Dynamic risk management - Findings from EFRAG's 2016 outreach

EFRAG undertook outreach with a sample of European banks in order to understand their objectives and processes for managing their interest rate margin. This paper reflects the different practices these banks use in managing the interest rate risk of their structural balances within the banking book. The paper also summarises the theoretical background to these activities. EFRAG hopes that these findings will help the IASB in developing an improved approach to reporting the effect of dynamic risk management activities in the financial statements.

The outreach was focused on the modelling of structural balances (i.e. demand deposits and equity) in the context of managing interest margins. It explores the range of practices employed by banks in modelling these balances.

The objective of these activities was generally described as stabilising net interest income. Some banks also aim to optimise net interest income.

The paper also provides some theoretical background to these activities and considers both the risk management and the accounting perspectives.

Although the focus of this outreach was on banks, EFRAG believes that any future solution for reporting the effect of dynamic risk management activities in the financial statements should be relevant for various industry sectors. The initial focus on banks is intended as a first step before broadening the scope.

The full publication can be found here.

Related project

Dynamic Risk Management

Responsibles
Sergey Vinogradov
Didrik Thrane-Nielsen
Phase
Monitoring
Topics
Equity, financial instruments and hedging