TopQuants 2014 Spring Event on “Interest rate risk in the banking book” includes three presentations and a lively panel discussion

Patty Duijm, Marije Elkenbracht – Huizing, and Cars Hommes were the speakers at the TopQuants Spring Event, held at DNB headquarters in Amsterdam

The 2014 TopQuants Spring Event conducted at the headquarters of the Dutch Central Bank (De Nederlandsche Bank, DNB) has attracted over 170 attendees interested in quantitative finance: “The right topic, at the right time, in the right place”, as one participant commented. Indeed, the timing could not have been better – on 28 May 2014, only days before the announcements of the European Central Bank to introduce negative interest rates for the first time in the history of the common European currency.

Unlike previous TopQuants Spring Events, this one did not offer one key note speech, but a combination of three speakers. After a short welcome by TopQuants committee member Marieke van der Klip,  there was an introductory speech given by Marlou Banning (Director, DNB, Finance and ICT) in which she briefly mentioned about the preparatory work carried out by DNB for the European Single Supervisory Mechanism and in particular, referred to the coverage of that in the March 2014 TopQuants Newsletter.

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Patty Duijm (DNB) as the first speaker gave an introduction to the topic interest rate risk from the point of view of the regulator (Patty Duijm – Interest rate risk in the banking book – A financial stability perspective). She explained why the DNB considers the resilience with respect to, possibly large, interest rate moves an important aspect of the stability of the financial sector as a whole. She discussed briefly the impact of interest rate changes on banks, pension funds and insurers, taking a 250 basis point shock and Japan shock as illustrative examples, and also touched on the interaction with credit risk. Aware that her presentation focused mostly on conceptual and qualitative aspects of the topic, Patty modestly admitted “I have not quantified anything”.

The next presentation, by Marije Elkenbracht-Huizing (ABN AMRO), approached the topic more from a model perspective, and from the point of view of a commercial bank (Marije Elkenbracht – Interest Rate Risk in the Banking Book – Challenging Times). Marije summarized the broad agreement of most professionals in the field that “Rates will eventually go up – but when?”, and contrasted this with the lack of consensus on how banks should steer the interest rate exposures most effectively. She took the market for mortgages before and after 2007 as an example, and posed the question whether one should base related models on history, expectation, or both. Her talk also included discussions on the most appropriate metric to use for measuring interest rate risk and her preferred metrics seems to be on Net-Interest-Income at Risk and Duration measures.

The third speaker, Cars Hommes (University of Amsterdam), talked about simulations of market behavior in laboratory experiments (Cars Hommes – Experiments and models of non-rational behaviour). He combined an introduction to this topic with interesting recent findings of his own research, in particular on stability and volatility of prices as observed in such experiments. His experimental study also focused on the validation of rational agent behaviour at the individual and macro levels. Despite not being directly linked to the topic of interest rate risk in the banking book, Cars’ talk resounded very well, judging from the many questions from the audience.

The presentations were followed by a panel discussion with active involvement of the audience. All three speakers as panel members were asked to comment on one or more of the participant questions which had been collected earlier by TopQuants members, Marieke van der Klip and Martin van Buren, and Diederik Fokkema as a discussion facilitator.

The discussion was followed by a networking game introduced by Hildegard Montsma (Risk Manager at Autoriteit Financiële Markten) with complimentary drinks and snacks sponsored by the event host. TopQuants are grateful to DNB for sponsoring and hosting the event. Special thanks go to all three speakers as well as to the quant audience for making this another successful TopQuants event. More information on this and future events will be published in the next TopQuants newsletter.