Managing Interest Rate Risk: The Time Is Ripe for Scrutiny
Given the precipitous decline in interest rates, the importance of interest rate risk (IRR) management is acute today. Celent estimates that a rate reversal could shrink U.S. banks average net interest margin up to 10 b.p., reducing net interest income by as much as US$6 billion overall.
In a new report, entitled , Celent Communications examines the changing face of asset-liability management (ALM) at the organizational and technological levels. Recent advances in risk management are significantly augmenting ALMs ability to face current challenges. In particular, asset-liability managers are increasingly able to understand and optimize the trade-off between managing earnings and value. Advanced ALM applicationsboth proprietary and third-partyare moving in this direction, providing prescriptive information on risk/return optimization.
According to Alenka Grealish, manager of the banking group at Celent, "ALM is increasingly contributing to shareholder returns and optimal capital allocation. The tightening of organizational ties across risk management arenas and increased decision-making based on comprehensive RAROC have pushed ALM and other risk management endeavors beyond their traditional regulatory and accounting roles."
In addition, Celent expects credit risk and IRR management to converge, just as ALM and trading risk management practices have. Common contract-level data and consistent core calculations (e.g., for market valuation and VaR) will facilitate the migration toward enterprise-wide risk management systems.
The ALM vendors covered in this report are:
- Algorithmics (Canada)
- COR-IBS (United Kingdom, acquired ABS Solutions)
- Fernbach (Luxembourg)
- IPS-Sendero (USA)
- IRIS (Switzerland)
- Kamakura (USA/Japan)
- QRM (USA), and
- Sungard-Bancware (USA)
A is available online.
of Celent Communications' Wholesale Banking and Retail Banking research services can download the report electronically by clicking on the icon to the left.
Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].
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Table of Contents
|San Francisco, CA, USA January 9, 2003
Managing Interest Rate Risk
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