Enterprise Risk Management at ABN AMRO

Details

Themes: -
Period : 2003
Organization : ABN AMRO
Pub Date : 2003
Countries : Global
Industry : Banking

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Case Code : ERMT-023
Case Length : 19 Pages
Price: Rs. 300;

Tools

Market Risk Contd...

Interest Rate Risk
Group ALCO set limits to ensure that the potential adverse impact on trading and non-trading earnings, due to market movements, was well controlled. Group ALCO monitored the activities of ALCOs in the US, the Netherlands and Brazil. Some other countries had ALCOs with centrally approved limits. In smaller countries, all interest rate risks (trading and non-trading) were managed within the market risk framework.

Several methods were used to monitor and limit non-trading interest rate risk - scenario analysis, interest rate gap analysis and market value limits. Model-based scenario analysis was used to monitor the interest rate risk positions denominated in EUR and USD in Europe and the US. Interest rate risk positions in other currencies and other countries were managed by gap analysis and/or market value limits, as these positions were typically less complex. Simulation models and estimation techniques were used to assess the sensitivity to movements in the shape and level of the yield curve. Assumptions about client behavior played an important role in these calculations. This was particularly relevant for loans such as mortgages where the client had the right, but not the obligation, to repay before the scheduled maturity.

On the liability side, the re-pricing characteristics of savings and deposits were based on estimates since the rates were not coupled to a specified market rate. A statistical approach was used for forecasting and sensitivity analyses because it best suited these products. Although comparable with macro-economic forecasts in many ways, this approach was based on information in individual client contracts.

The sensitivity of net interest revenue to interest rate conditions was estimated, assuming an immediate and lasting shift of 100 bps in the term structure of interest rates. ABN Amro's sensitivity analysis indicated that such an upward movement would lower net interest revenue by 3.8% in the first year after the rate jump. A downward shift would raise net interest revenue by only 1.1%, (based on the bank's positions as of 31 December 2002). This asymmetric outcome was largely due to the historically low levels of interest rates in the US and Europe in recent times, leading to unprecedented pre-payment behavior in the US and leaving limited scope to adjust rates on the liability side in the US and Europe.

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