Feeling over regulated? Don’t forget to make a healthy interest margin in 2015

The new regulations that came into force last year and continue into 2015 are a significant challenge particularly for Banks and Building Society finance departments.

The new prudential regulations focus on capital and liquidity. It is widely accepted that Building Societies and Banks have strong liquidity positions and control capital resources well and many close to the detail will find many of the new regulations not only resource consuming and expensive to comply but also not all that helpful. The concern though is we do not want these regulations to take focus away from making a healthy and sustainable interest margin. Managing interest margins needs to be the focus.
In 2015, Interest rate risk and margin management is getting more complex and needs constant scrutiny and analysis, particularly if margins are to remain healthy in the medium term.
Bank base rates have not have changed for years but finance and treasury departments know that Interest rate risk and margin management is probably now the most important financial issue for building societies in 2015.
In the last few months we have seen 10yr swap rates fall by over 50 bp, SwissFranc rates have turned negative and whist this may not effect building society and banks financials straight away, it is a signal of a fundamental change to capital markets.
These market rates are an expression of what the market believes shorter term rates are going to be over the medium to long term, and there is no doubt the market has modified its expectation of an early rise in interest rates. On the other hand competition for funding is increasing and the mix of interest basis on assets and liabilities is changing as building societies face the challenge of market and regulatory pressures. There are however, opportunities to build healthy margins and the finance department with skilled treasury and asset liability management expertise and analysis will be best placed to navigate this.
This involves a good FTP technique where the true cost of liquidity is calculated – a liquidity charge that is right for the particular firms and not based on assumptions only relevant to large firms that access wholesale capital markets. It needs good margin variance analysis to understand margin movements and the relative contribution of that different lines of business provide and most importantly a forward looking analysis that can provide management with a vision to implement the right business strategy. The good news is that it is also far more interesting than filling in COREP returns!
Wishing you all a prosperous 2015.


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