Interest and Liquidity Risk management

Overview

A German bank, part of a French-based multinational financial services company, was required to implement group-wide software for interest and liquidity risk monitoring and management. This initiative aimed to enhance regulatory compliance, ensure consistency across group entities, and improve financial performance through risk-informed decision-making.

Aspect Advisory was engaged to lead the project from technical implementation to liquidity and interest rate scenario modeling. Additionally, a Fund Transfer Pricing (FTP) model was developed to assess the profitability of various financial products, enabling the bank to make more data-driven pricing and capital allocation decisions.

OTT services play a critical role in facilitating international payments and cross-border transactions, yet inefficiencies in cost structures and operational workflows often lead to higher processing costs, reduced margins, and suboptimal pricing strategies. The objective of this initiative was to identify cost leakages, optimise the transactional process, and implement a sustainable cost-efficient framework for the bank’s OTT services.

Solution

Aspect Advisory worked in close collaboration with the client at both group and individual bank levels to ensure:

Key Solution Components:

Regulatory Compliance & Group-Wide Consistency – Ensured the implementation met local and global regulatory standards while maintaining consistency with other group entities.
Interest & Liquidity Risk Monitoring Software Implementation – Successfully integrated group-wide risk management software to track liquidity and interest rate exposures in real time.
Advanced Liquidity & Interest Rate Scenario Modeling – Designed and tested various economic scenarios to assess potential risk impacts on profitability and capital planning.
Fund Transfer Pricing (FTP) Model Development – Built an FTP framework to improve the profitability analysis of financial products, ensuring accurate allocation of funding costs.
High-Granularity Risk & Profitability Analysis – Enabled transaction-level transparency, allowing precise liquidity management and risk-informed pricing strategies.

Results & Impact

The implementation of the interest and liquidity risk management framework delivered tangible benefits in risk oversight, financial performance, and regulatory compliance.

Enhanced Transparency in Liquidity & Interest Rate Risk – Provided a clear, structured view of risk exposures at a granular level.
Improved Profitability through FTP & Risk Modeling – Enabled the bank to optimize pricing strategies, leading to increased profitability.
High Degree of Granularity at Transaction Level – Improved risk assessment accuracy by analyzing individual transactions rather than relying solely on aggregate data.
Stronger Strategic Decision-Making – The integration of liquidity risk metrics into the bank’s financial planning allowed for more proactive risk management.

Strategic Themes Addressed

Treasury & Asset-Liability Management – Strengthened capital and liquidity risk management practices.
Regulatory Reporting & Compliance – Ensured alignment with group-wide standards and local regulations.
Risk-Informed Profitability Strategies – Leveraged FTP and risk modeling to drive better financial performance.

Key Skill Sets Utilised

Finance Applied to Balance Sheet Management – Optimized risk-adjusted capital allocation strategies.
Data Analysis & Interest Rate Risk Modeling – Conducted scenario analysis for interest rate fluctuations.
Liquidity Risk Management – Designed liquidity stress testing frameworks to meet regulatory standards.
Fund Transfer Pricing (FTP) Implementation – Developed a structured methodology to allocate funding costs accurately.

Business Areas Impacted

Treasury & Liquidity Management – Enhanced real-time tracking and management of liquidity risks.
Asset-Liability Management (ALM) – Strengthened alignment between risk exposure and profitability strategies.
Regulatory Reporting – Ensured compliance with liquidity risk requirements at both local and group levels.

Insights: Key Learnings & Industry Implications

1. The Critical Role of Liquidity & Interest Rate Risk Management in Banking

Effective liquidity and interest rate risk management is essential for:

Protecting profitability amid changing market conditions.
Ensuring compliance with regulatory liquidity standards (e.g., LCR & NSFR).
Optimising capital allocation strategies for long-term financial sustainability.

2. The Value of Fund Transfer Pricing (FTP) in Enhancing Profitability

A well-founded FTP model enables banks to:
Allocate funding costs accurately, ensuring transparency in financial product profitability.
Improve pricing strategies, making financial products more competitive.
Align internal pricing structures with risk and capital allocation objectives.

3. Future Trends in Liquidity & Interest Rate Risk Management

AI & Machine Learning for Risk Forecasting – Banks will increasingly adopt AI-driven models to predict liquidity shortfalls and interest rate risks.
Real-Time Risk Monitoring – Financial institutions will implement automated dashboards for live tracking of risk metrics.
Regulatory & Economic Integration – Liquidity management strategies will need to align not just with regulatory mandates but also with economic cycles and market fluctuations.

Conclusion

By implementing a comprehensive interest and liquidity risk management framework, Aspect Advisory enabled the German bank to achieve greater risk transparency, improve financial product profitability, and enhance compliance with group-wide and regulatory requirements.

The integration of advanced scenario modeling, FTP, and real-time liquidity monitoring tools ensures that the bank can proactively manage risks, optimise profitability, and maintain financial resilience in a dynamic economic environment.