Is your ALM model landscape future-proof


Is your ALM model landscape future-proof

How various developments impact your model landscape

IRRBB and liquidity risk regulation are maturing, with several new publications and changes ahead. COVID-19 and different market trends further add to the increasingly complex challenge of effectively measuring and managing ALM risks. This article walks you through the highlights of recent developments and sheds light on the impact on your ALM model landscape.

The regulatory landscape for ALM is maturing

In the last few years, the regulatory guidance on ALM management and models has accelerated. Several new publications on Interest Rate Risk in the Banking Book (“IRRBB”) and liquidity risk are increasing the burden on the internal risk management systems of banks and on ALM modelling and validation teams. 

In the CRD V of May 2019 the EBA was mandated to submit three new publications on IRRBB in June 2020 (which, in light of COVID-19, was delayed to March 2022). These publications will cover topics that have been subject to heavy debate in the build-up towards the 2018 IRRBB Final Guidelines:

  • Standardised approach for IRRBB.
  • Updates to the supervisory outlier test including revision of shock scenarios, different treatment of own equity, commercial margin and spread components, and changes to the balance sheet assumptions.
  • Criteria for evaluating internal IRRBB and Credit Spread Risk in the Banking Book (“CSRBB”) systems and for determining which internal systems are not satisfactory. Institutions with non-satisfactory systems can be forced to change to the standardised approach.

Including the announced publications for March 2022, we have identified six regulatory developments impacting the ALM model landscape (see the figure below).

Further regulatory developments include:

  • The IBOR transition, impacting ALM models by forcing banks to recalibrate models that include disappearing rates as risk factors and to redevelop yield curve methodologies. The limited availability of historical data on the new benchmark rates complicates the matter. 
  • Increased supervisory focus on economic capital models. Supervisors are putting more emphasis on bank’s internal assessment of risks and are upping the standards for economic capital models. 
  • Increased requirements for ILAAP announced in CRR II, including the introduction of Additional Liquidity Monitoring Metrics (ALMM) and the Net Stable Funding Ratio (NSFR).  Banks need to adhere to the minimum NSFR and report ALMM as from June 2021 to remain compliant.

The maturing regulatory landscape impacts ALM modelling in various ways. Banks need to stay up to date on changing requirements and be quick to adapt in order to keep up.


Market forces necessitate continuous development

Next to regulatory developments, the market is facing significant turmoil. COVID-19 is changing the world, putting existing behavioural assumptions at risk. Prolonged low interest rates and increasing competition further add to the challenge.


  • COVID-19 has caused severe market volatility and changes in bank and client behaviour.
  • Banks must monitor ALM models more closely and recalibrate more frequently as both market and behavioural parameters may not be up to date anymore.
  • COVID-19 caused a large inflow of volume on individual’s bank accounts; reinforcing the substitution effect where a lot of volume is stuck on current accounts.
  • The volume inflow puts additional pressure on behavioural models for liabilities.

Prolonged low rates

  • COVID-19 drove down already historically low interest rates, leading to further compression of interest rate margins.
  • On the liability side low rates already activated floors on client rates. On the asset side banks are challenged to think about (implicitly) flooring client rates to maintain margin. 
  • Floors on client rates lead to changing IRR characteristics and more margin instability.
  • ALM models need to explicitly treat floors to be compliant with guidelines, to stabilise margins, and to make sure the floor risk is correctly allocated within the organisation.


  • Competition is increasing, with several new players entering both the mortgage / loan market and the payments / savings market, again driving changes in customer behaviour that need to be captured in ALM models.
  • Bank are pressured to offer instant payment around the clock, significantly changing intra-day liquidity requirements and dynamics. Banks are challenged to step up their game in intra-day liquidity modelling and management.

The rapidly changing market forces banks to be flexible to continuously develop their ALM modelling landscape and capabilities.


ALM Modelling Readiness Assessment

Deloitte offers the ALM Modelling Readiness Assessment to future-proof your ALM model landscape. In this assessment, we aim to make sure the full ALM model landscape is compliant with all relevant and upcoming regulations, up to date with respect to market trends, up to standard compared to peers, and aligning with the bank’s strategic objectives.

In order to achieve these goals, we offer an 8 week structured assessment across multiple domains, including:

  • Strategic objectives and design principles to guide the organisation through trade-offs between operational ambitions and business needs specific to ALM models.
  • The development of a governance framework through buy-in from senior stakeholders.
  • A landscape of strategic IT systems, supported by data quality controls and robust service agreements.
  • The ALM model landscape and capabilities of the different models.
  • Compatibility with different use cases (e.g. stress testing, FTP, and various reports).
  • The adherence to current and future regulation.


Interested in discussing this further?

Do you want to further discuss how the upcoming regulatory changes will impact your bank’s IRRBB landscape? Or are you looking for an assessment of your current IRRBB or wider ALM landscape versus regulatory developments, market developments and market best practices?

The Deloitte ALM team has extensive international experience in ALM, covering regulatory gap assessments, IRRBB systems, methodology assessments and model development and validation. Please do not hesitate to contact us via the details below. We are looking forward to discuss these topics with you.

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