Learn, explore and unleash your inner chef.

What are the main steps to bring EVE and NII modelling together?

This is not an easy task as the current ALM practices and the market risk measurement worlds follow different mindsets. Starting point for Alignment of the modelling is the definition of a clear view for every ALM product in connection with the balance sheet structure, what must be measured and steered in the EVE and the NII world. The most important question here is what is considered roll over/new business in the static (EVE) and the dynamic approach (NII).

What should banks take into consideration when calculating EVE for specific products?

The question is basically related to the capital markets modelling practice and how to consistently deal with margins in the pricing of non treasury products. There is a strong interlink between IRRBB and CSRBB. On the asset side, there are clear valuation rules from IFRS9 that could be applied. On the liability side, it is more complex because there is no standard for a proper EVE calculation. Consistency with the asset side is the most challenging task. For instance the inclusion of contractual zero floors cannot only be done on the asset side but have to be taken into account on the liability side as well.

Should equity be included in the EVE calculations and what are the main challenges of modelling equity?

The ALM management should have a clear definition of the interest risk appetite (volume and durations) where the equity is placed. But I agree with the regulator, that modelling equity as an interest sensitive liability in EVE (BPV limits), is incorrect. First of all, there is no mathematical correlation between dividends of the equity and the interest rate development. Secondly, the real static interest rate risk of the asset side would be covered by the modelling, leading to incorrect risk figures. In my opinion, the equity and the corresponding assets should be shown in the IR BPV exposure profile.

What would you like to achieve by attending the 3nd Edition Managing Interest Rate Risk in the Banking Book conference?

The topics are very interesting and have many valid solutions. I am looking forward to interesting discussions and to obtain new insights on the many challenges involved in finding an improved IRRBB steering.