Interest rate volatility is forcing banks to rethink how they balance profitability, risk, and governance. Senior treasury and risk practitioners argue that stronger collaboration, faster decision-making, better data, and a healthy risk culture are becomi
As interest rate uncertainty
continues to challenge balance sheet management across Europe, banks must
resist the temptation to rely solely on models and instead strengthen the
collaboration between risk, treasury, and business functions.
According to a senior asset and
liability management executive at a major Central European bank, models should
be viewed as a starting point for decision-making rather than an automated
answer.
"All models are wrong, but some
are useful," he said, arguing that judgment, communication, and risk
culture remain the foundations of sound governance.
That conclusion emerged during a
panel discussion at CeFPro's Treasury & ALM Europe conference, where
practitioners explored how banks can navigate a volatile interest rate
environment while protecting profitability and maintaining stability.
For many institutions, the challenge
begins with uncertainty itself. While markets continue to debate the future
direction of interest rates, panelists argued that uncertainty is not a new
phenomenon.
What matters is how banks organize
themselves to respond to it. The senior ALM executive observed that no single
function should own the response.
Instead, effective decision-making
depends on close cooperation between first- and second-line teams, supported by
open communication channels and a strong risk culture.
He argued that risk culture has not
received enough attention in recent years despite being a critical factor in
maintaining institutional resilience.
Reflecting on recent banking sector
disruptions, he suggested that asset and liability management weaknesses were
often symptoms of deeper cultural issues rather than the root cause of
failures.
The discussion highlighted how recent
events, including the pandemic, geopolitical instability, and rapid interest
rate movements, have exposed the limitations of purely model-driven approaches.
A senior treasury risk specialist at
a large European bank explained that customer behavior models remain valuable
but increasingly require management judgment.
"Models are just a starting
point of discussions," he said. Institutions frequently supplement
quantitative outputs with market intelligence, competitor analysis, business
feedback, and assessments of risk appetite before reaching decisions.
The panelists agreed that governance
frameworks must evolve to keep pace with changing conditions.
Greater emphasis should be placed on
asset and liability committee processes, including more frequent monitoring,
improved internal coordination, and richer management information.
The treasury risk specialist
suggested that institutions may need to reduce their dependence on net interest
income by exploring more diversified and stable revenue sources where possible.
