Low Interest Rates: Side Effects in Risk and Profitability Management

Interest rates are historically low, and many predict they can move still lower. This continues to have a strong impact on the returns of banking portfolios and the performance of trading desks.

For banks, interest income has been low for many credit portfolios — including those holding mortgage loans — and negligible for some products like investment grade bonds.

Low interest rates naturally reduce interest income. We are beginning to see a divergence in economic output, inflation, and the interest rate outlook globally, most notably in the US, which may in turn create volatility in exchange rates and interest rate differentials. This would introduce extraneous factors which - although not immediately obvious - can affect default probabilities, credit ratings and spread levels.

Banks run scenarios and perform integrated analysis to help anticipate the possible outcomes of different future rate paths and the correlated credit and behavior risk factors to assess their impact on income, profit, and loss.

In this webcast we will discuss:

• Credit portfolios containing short- to medium-term instruments with low-interest rates
• Derivatives for hedging against interest rates
• Real-world scenarios linked to behavior, credit, and counterparty risk factors
• Forward-looking behavioral models for managing liquidity and interest rate risk in the banking book