Interest Rate Risk in the Banking Book – What are the impacts of Volatility and a rising rate environment for banks in the UK?

This blog post discusses the impact of recent volatility, a rising rate environment, and the need for dynamic, forward-looking software solutions to support banks in responding to it.

It is fair to say that the combination of recent “Black Swan” events, such as the COVID pandemic, the Geopolitical Environment with respect to the war in Ukraine, and the global energy and supply chain implications created by both. Like many other markets, the UK faces significant inflationary pressure and continued interest rate volatility.

Given the impact on pricing, liquidity, and capital that rising interest rates bring, banks need to review models and calibrations made in low interest rate environments. Perhaps banks need to be even more focused on shocks involving further interest rate rises.

Stress Testing and Financial Planning are even more critical in times of volatility; loan impairment forecasting, affordability stresses on the credit quality of borrowers, and the projected repricing of loans and deposits versus rising cost projections caused by inflation are just some of the key forward-looking metrics banks should be focusing on.

Many Banks are hampered in their ability to re-adjust or recalibrate models in “black box” ALM software products, which often require ‘programming’ to re-model assumptions. Some banks even rely on complex and onerous spreadsheets, which are by no means agile enough to recalibrate in periods of high volatility.

MORS customers benefit from a flexible ALM solution designed by and used by ALM and Treasury professionals. MORS is a transparent and intuitive ‘no programming required’ solution that offers ALM and Financial Risk Management for interest rate, liquidity, and credit risk. It also offers fully-fledged profitability and performance forecasting and planning, supporting the constant need for re-planning in these highly volatile times.

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