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 Managing Interest Rate Risk: The Time is Ripe for Scrutiny, 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)