Managing Interest Rate Risk: The Time Is Ripe for Scrutiny

January 9, 2003

Abstract

San Francisco, CA, USA January 9, 2003

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 ALM’s 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 applications—both proprietary and third-party—are 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.

        

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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 operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

 

San Francisco, CA, USA January 9, 2003

Managing Interest Rate Risk

Return to report Abstract

 

EXECUTIVE SUMMARY 3
RISK MANAGEMENT RISES THROUGH THE RANKS 5
  Banks' Growing Risk Tree 5
  Enterprise-Wide Risk Management: Pruning The Tree 6
  Regulations Change The Face of Risk Management 9
ASSET-LIABILITY MANAGEMENT MATURES 11
  IRR Management in the Limelight 11
  A Brief History of ALM 14
  Analytics: ALM Meets Trading Risk Management 16
MAKING A NEW ALM ORDER 19
  Tipping the Scale in Favor of Science 19
  Gradual Synchronization of ALM and Credit Risk Management 20
  Putting the ERM Puzzle Together 21
VENDORS PUSH THE ALM ENVELOPE 24
  Market Presence 24
  Product and Technology Overview 26
  Algorithmics 29
  COR-IBS 31
  Fernbach 33
  IPS-Sendero 34
  IRIS 35
  Kamakura 37
  QRM 38
  Sungard-Bancware 40
CONCLUSIONS 43
APPENDIX 44

 

        

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