MACMILLAN Bank Asset-Liability Management: A Guide to Managing Interest Rate Risk in the Banking Book for Practitioners, Regulators, and Supervisors in the EU

This book provides a practical and intuitive view of how European banks manage asset-liability mismatch risk from both a practitioner and supervisory perspective. After a prolonged period of zero interest rate policy (ZIRP) by central banks around the world, the period from Q1 2022 to Q2 2023 has seen the largest, fastest, and most widespread increase in interest rates since the 1980s, with 1-year euro yields rising by more than 400 bp. The recent market turmoil has exposed the increased vulnerability of banks, particularly those with significant exposures to long-term, fixed income assets, fueled by shorter-term, less stable funding. This challenging interest rate environment reinforces the strategic importance of asset-liability management (ALM) for banks. Indeed, a bank's survival now depends more than ever on prudent ALM. This book introduces the most common components of interest rate risk management within a bank's asset-liability management framework, including the concepts of economic value of equity (EVE), net interest income (NII), funds transfer pricing (FTP), and the replicating model. In addition to bridging the gap between widely used general interest rate risk management techniques in the fixed income area and what is best practice in European banks, the book also provides an update on recent changes in the regulatory framework for European banks' management of interest rate risk in the banking book (IRRBB), including new EBA guidelines. It also covers the latest developments in interest rate risk management, such as rapidly changing interest rates and modeling bank customers' behavior.