Rising Rates Force New Discipline in ALM and Liquidity Strategy

The deputy director of ALM risk at an Eastern European bank says he has witnessed a rapid shift in the region’s interest rate environment rewrite long-standing assumptions about balance sheet resilience. 

He told delegates at a CeFPro conference earlier this year that the nearly 600-basis-point rise in rates over a short period had delivered a shock that had been felt across the sector, testing the durability of even the most established risk frameworks. 

For his institution, the impact was immediate, with mark-to-market losses on Held for Sale and Fair Value portfolios weighing on capital ratios and forcing a careful reassessment of exposures.

The expert emphasized that while the bank has always kept investment activity within its available capital buffers, rising losses required disciplined adjustments. 

Instead of accelerating risk, the team eased back, allowing natural portfolio runoff and time decay to support recovery. 

However, the executive stressed that passivity plays no role in effective ALM. The bank monitors its securities through thousands of internal triggers and limits, using scenario-based stress testing to understand vulnerabilities ahead of time. 

Steepening, flattening, and parallel yield curve shifts are all built into routine analysis to reveal early warning signs, he told the conference.

One structural factor provided meaningful support: the balance sheet’s composition. 

A large floating-rate mortgage book meant interest income rose alongside rates, while a stable share of funding drawn from current accounts strengthened profitability despite asset-side losses. This natural hedge proved instrumental in absorbing the shock.

He also noted that regulatory measures introduced during the pandemic offered additional relief. The CRR Quick Fix allowed temporary neutralization of some fair value losses when calculating regulatory capital, giving the bank breathing room while volatility surged. 

Even so, the speaker noted, the bank avoided over-reliance on one-off measures, instead prioritizing long-term capital strength.