Persistent volatility is forcing banks to rethink how they manage funding, pricing, hedging, and balance sheet risk. Industry experts argue that institutions must combine stronger investor relationships, sophisticated risk analysis, and effective governan
Market instability is no longer an
exceptional event that banks prepare for occasionally. It is becoming a
permanent feature of the operating environment, requiring institutions to build
resilience into every aspect of funding, pricing, and balance sheet management.
That was the conclusion reached by
two senior banking specialists who argued that while volatility may be
unavoidable, institutions can improve their ability to navigate it through
stronger risk management, better investor engagement, and a more disciplined
approach to decision-making.
Speaking at CeFPro's recent Treasury
& ALM Europe conference, the Head of Financial Analysis and Investor
Relations at a Central European bank reflected on how geopolitical events
transformed funding conditions almost overnight following Russia's invasion of
Ukraine.
The executive explained that his
institution had spent several years building access to international debt
markets through covered bond and MREL issuance programs. By early 2022, the
bank believed it had established a growing investor base and was preparing a
public MREL transaction.
Those plans were abruptly interrupted
by the outbreak of war.
"Of course, we did not go on the
market on that day," the executive said.
While liquidity remained relatively
stable, partly because deposit outflows failed to materialize and refugee
inflows supported banking activity, the challenge shifted to execution risk
within debt markets.
The institution ultimately delayed a
planned issuance by almost a year.
"The trick was not about the
pricing, but the trick was about the execution probability," the senior
banker explained.
Investor sentiment across Central and
Eastern Europe deteriorated sharply, making successful issuance uncertain
despite underlying demand for funding. The experience reinforced the importance
of maintaining strong relationships with investors before periods of market
disruption occur.
"What we learned from that, that
it is very important to build trust with the investors and have a good relation
with some particular strong investors that you can rely on," he said.
Alongside funding challenges,
volatility has also transformed how institutions think about pricing and risk
management.
A Head of Market Risk Model
Validation at an international bank argued that understanding portfolio
composition remains fundamental to any successful hedging strategy.
Effective risk management begins with
identifying key exposures, duration characteristics, convexity profiles, and
concentration risks before selecting the appropriate instruments.
The risk specialist emphasized that
pricing and risk measurement are often viewed through different lenses.
"One thing is about fair
value," he said, noting that market-standard pricing approaches may be
suitable for valuation purposes but not necessarily for understanding risk
exposures under stressed conditions.
Instead, he argued that institutions
should increasingly view hedging as an optimization problem that balances
multiple objectives, including earnings stability, economic value preservation,
and risk reduction.
"The main question there is
about the duration gap," the executive said.
From his perspective, scenario
analysis and stress testing have become essential components of modern risk
management. Rather than focusing solely on current market conditions,
institutions should evaluate how portfolios perform under a range of potential
future outcomes.
