Adapting to a changing interest rate environment and managing risk as volatility continues
The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.
By Cédric Cavallier, Senior Business Development Consultant, ActiveViam
What are the impacts of increased volatility on institutions?
In one word: uncertainty. Financial models can generally predict how future events will play out – all things being equal in stable markets. However, with high volatility some business segments will be more impacted than others, but it is not clear which ones will have difficulties. Banks’ lending activity will likely decrease. The liabilities will reprice earlier than the assets due to the maturity mismatch, further leading to an increase in funding but not necessarily an increase in revenue. Overall revenue (e.g., net interest income, fees) will likely decrease for banks while costs increase (i.e. Expected Credit Loss). Regulatory capital will also increase and ROE is expected to be negatively affected.