We were delighted to hold a webinar last Wednesday 19th July, on the new UK Mortgage Charter and its implications on Interest Rate Risk, which was well attended by over 60 banking institutions. Luke & Joe DiRollo from ALMIS® International were joined by IRRBB expert Paul Newson.

The UK Mortgage Charter, which took effect this month, and was jointly confirmed and implemented by the Financial Conduct Authority and the UK’s principal mortgage lenders, serves the crucial purpose of providing reassurance and support to borrowers amid uncertain economic conditions and high-interest rates. During our webinar, our panellists unanimously agreed that the Charter brings about challenges for both the prudential regulator and fixed-rate lenders.

Of particular significance are two key agreements outlined in the Charter.

Firstly, qualifying repayment mortgage customers now have the option to switch to interest-only payments for a period of 6 months or extend their mortgage terms to reduce their monthly payments. Our expert, Paul, pointed out that lenders have been encouraged to support this for longer durations, similar to the Covid support schemes. Additionally, by net-hedging repricing mismatches, changes in repayment structures due to this option could be more effectively managed and supported. Our panel highlighted that institutions should also consider the wider credit risk implications of assisting these customers and explore ways to provide further support.

However, the second agreement, which comprises two terms, raised concerns among our panellists. This agreement allows customers approaching the end of a fixed-rate deal to lock in a new deal up to six months in advance, granting them the flexibility to either proceed with the new deal or request better like-for-like products if rates fall. This “loose-loose” scenario poses challenges for lenders, as Joe explained. Decisions on hedging pipeline at acceptance are crucial and involve inherent risks. Hedging less than the full amount could lead to losses if rates rise, while hedging more than the full amount may result in a higher-than-market-rate hedge for the loan period. While this agreement doesn’t necessarily change the mechanics of fixed-rate lending, it exacerbates a free and valuable customer option that the market has considered necessary to compete. The FCA, together with other financial advisers, will encourage customers to exercise this option when suitable. Furthermore, we are now seeing an extension of this option from around 3 months to 6 months. Effectively, borrowers are better informed, the option duration is longer and market volatility is higher. All three of these components heighten the interest rate risk implications for lenders.

To address this, our panellists highlighted the importance of quantifying this risk should institutions engage in fixed-rate pipeline and the following approach was recommended for this:

1. Compute repricing gap pre hedge given contractual position of pipeline.
2. Decide and implement a hedging strategy based on behavioural assumptions.
3. Forecast balance sheet forward using multiple behavioural scenarios (e.g. expected, -3% and +3% scenario).
4. Run value/income sensitivity on the multiple behavioural scenarios based on hedging strategy.

During the webinar, we polled an audience of over 140 treasury professionals, revealing that 59% hedged fixed-rate loans on written offer, while 31% and 10% hedged on product launch and completion, respectively. In a typical scenario, 76% of attendees expected 51-75% of the pipeline to drawdown, with 24% expecting 76-100% conversion. Attendees did suggest that, in a stress scenario of a 3% fall in rates, 10-30% of pipeline would drawdown.

As the Charter increases the likelihood of pipeline not drawing down, hedging pipeline risk becomes riskier than before. However, our panellists unanimously agreed that forward hedging remains an optimal strategy. While the market has floated the idea of swaptions, they can compromise the commercial viability of mortgage products. Our experts, Paul and Joe, presented medium-term alternatives, such as capped variable mortgages and lookback options, to address these challenges. The discussion also covered the importance of product timing and how institutions should manage their offers in alignment with pipeline volumes, considering that introducing cheaper products could impact profitability.

As experts in treasury and ALM, we really enjoyed hosting this topical webinar and providing valuable insights into the implications of the UK Mortgage Charter on Interest Rate Risk. Stay tuned for more thought-provoking events and discussions from our team. Thank you to all who joined us and participated, and we look forward to continuing to lead the conversation on crucial financial topics.

If you have any more questions on this, or if you are interested in viewing a recording of the session and/or to see the presentation slides, please email us.

19 July 2023 10:00 – 11:00
Register online

Join us for our upcoming webinar where we will discuss the recent changes in the mortgage market, specifically the new Mortgage Charter introduced by the Financial Conduct Authority (FCA) in collaboration with the UK’s largest mortgage lenders. The charter brings about important considerations for banks in terms of interest rate risk management and hedge accounting.

Over 50% of the institutions signed up to the charter use ALMIS® to manage the interest rate risk associated with fixed-rate mortgages. In this webinar, we will address the challenges faced by financial institutions in hedging interest rate risk, including the new requirement to offer customers the opportunity to lock in a mortgage deal up to 6 months in advance of their existing fixed-rate product. We will explore strategies to effectively manage this risk and discuss potential solutions.

What we’ll cover during the webinar: 

1. Overview of the risks arising from the Mortgage Charter
2. Understanding interest rate risk and its impact on mortgage portfolios
3. Hedging strategies for managing interest rate risk on mortgage pipeline and product conversions
4. Stress testing and reporting, leveraging technology and ALM solutions to streamline risk management processes
5. Cashflow hedge accounting and its application in the absence of on-balance sheet items

Our panel of industry experts with extensive knowledge and experience in ALM and risk management will provide valuable insights into these crucial topics. You will have the opportunity to gain insight, ask questions and hear discussions on best practices to navigate the evolving landscape of the mortgage market.

Whether you are a risk manager, treasurer, or finance professional in the banking industry, this webinar will provide an update on the latest thinking for effectively managing interest rate risk or practical implementation of cash flow hedge accounting with the new mortgage charter.

Don’t miss out on this informative session – register for this free webinar.

We are delighted to announce that GB Bank, who were awarded their full banking license in August 2022, has chosen to add additional ALMIS® International products as it continues to drive forward its ambitious growth plans. Having already trusted ALMIS® International for their ALM and Regulatory Reporting requirements, GB Bank has now chosen to implement Cobalt® – ALMIS® International’s bespoke treasury management system for banking institutions. The Bank will also now use ALMIS® International for its Hedge Accounting solution.

Paul Pimm, Prudential Reporting Manager at GB Bank commented:

“We are pleased to extend the relationship with ALMIS® International and take on these two additional products.  The software will support the development of GB Bank’s offering and integrate with the proven and reliable existing ALM platform.”

Chief Product Officer at ALMIS® International, Luke DiRollo added:

“We are thrilled to extend our offering with GB Bank, who we have been working with since 2020. This agreement is a testament to the success of our relationship so far and we are excited to integrate our TMS and Hedge Accounting products.”

About GB Bank

GB Bank is dedicated to building and re-generating communities across the UK who need it most. By supplying SME property developers and property investors with a range of flexible finance solutions, from short term bridging finance to long term investment mortgages, they ensure their customers are fully supported throughout the entire lifecycle of both commercial and residential developments.

The development finance is supported by the banks recently launched fixed rate savings accounts. A GB Bank savings customer benefits from highly competitive rates, peace of mind knowing their savings are secure and their money is helping to support local community regeneration.

For more information about GB Bank visit www.gbbank.co.uk

About ALMIS® International

ALMIS® International is a leading provider of integrated risk management solutions for banking institutions. Our comprehensive suite of solutions includes Asset Liability Management (ALM), Regulatory Reporting, Financial Planning, Treasury Management, and Hedge Accounting. Our solutions are designed to help financial institutions optimise their operations, manage risk, and ensure compliance with regulatory requirements.

Our solutions are trusted by a wide range of banking institutions. We have a proven track record of providing exceptional customer service and support, and our solutions are designed to be flexible, scalable, and easy to use.

ALMIS® International, a leading provider of Balance Sheet Management, Regulatory Reporting and Hedge Accounting technology in the UK, are delighted to announce that Darlington Building Society have chosen to extend their 10-year relationship.

Darlington Chief Financial Officer, Steven Forth commented that “We are grateful to have ALMIS® International’s support and expertise covering asset liability management and Hedge Accounting. The software is proven and well respected across the industry and we are pleased to extend what has been a long and reliable relationship.”

“Chief Product Officer at ALMIS® International, Luke DiRollo added, ‘Extending our contract is a great testimony to the reliability and dependability of our software and services. We have enjoyed working with the Society for many years and are truly delighted that this will now continue into the future.”

About Darlington Building Society

Darlington Building Society operates throughout the North East and Yorkshire and had assets of £752m at 31 December 2021. The Society’s head office is in Darlington, where it has been based since 1856.

Darlington were named Best Self Build Lender for the second year running at this year’s Build It Awards.

About ALMIS® International

As market leaders in controlling financial risk, ALMIS® International uses proprietary cloud-based IP across a single fully integrated platform to enable global banking institutions to make insightful and timely management decisions.

For more information about the range of ALMIS® products visit https://www.almis.co.uk/product/

With benchmark interest rates expected to rise further over the next year, and continued uncertainty over the shape of the yield curve, banking institutions face significant pressure to ensure that they are effectively managing their interest rate risk to maintain profitability.

ALMIS® held an expert panel to discuss these hot topics, which was attended by over 130 practitioners from over 60 banking institutions.

Webinar Agenda

– Overview of current interest rate environment, yield curve and expected forward rates. 
– Quantifying interest rate risk positions – when and how to recognise exposure. 
– Managing interest rate margins and hedging strategies. 
– Risk appetite, limits and ALCO reporting.

This webinar, including the slides, are now available for our clients to view on the Client Area. However, if you are not a client and are interesting in viewing the webinar please simply email [email protected] to request it.

Since the company was set up in 1992 we’ve continued to develop compliant, fast to implement and easy to use software solutions for our clients.   We build upon feedback from our clients and in sharing of knowledge with our dedicated team to refine and hone our product offering and client support. Find out more about who we are what we do for banks and building societies in the UK and further afield with our new video. You can watch this video here.

We are very pleased to announce that the ISO9001 Quality Management System Certification has been awarded to us by BSI.

We have always had quality as a key strength, it has been and is at the core of our DNA. Our team have worked effortlessly with continuous improvement at each milestone . We are proud to announce recognition of our teams dedication and to achieve this standard of quality management certification. Very well done to all the team involved!

This week, ALMIS® International held a webinar on the Prudential Regulation Authority’s (PRA) Interest Rate Risk Standardised Framework. PRA is one of the successors to the Financial Services Authority and falls under the auspices of the Bank of England. The PRA Rulebook now states that a firm may elect to implement a standardised framework and our webinar set out to examine the impact of this.

The webinar was attended by around 60 of ALMIS® Internationals UK banks and building society clients, during which we examined the concepts behind the standardised framework and how this contrasts with ALMIS® software own models for calculating the BASIL 3 interest rate sensitivities.

Interest rate risk in the banking book has developed significantly following BASIL 3 reforms and now includes EVE (Economic Value of Equity) and Earnings Sensitivity Measures.

The majority in attendance felt they would continue instead with our ALMIS® software calculation method which is inherently more accurate as it uses more granular cash-flow periods.

However, some attending the webinar said they would prefer the new PRA regulatory metric which ALMIS® now supports using a dedicated report writer template. This integrates direct feeds from ALMIS® calculated cashflows and yield curves.

Moreover, we welcome the new standardised framework and wish to support this as well as the more accurate calculations supported in ALMIS® software.

ALMIS® central function is to support decision making around interest rate risk hedging and to combine this with the UK’s regulatory framework and reports.

We are organising a full day masterclass on IRRBB using ALMIS® software to assist clients on 25 th May, and the ALMIS® User Group meeting on the following day we will discuss this subject further.

If you are interested in any element of financial regulatory reporting, then please get in touch via LinkedIn.

ALMIS® International is delighted to announce that two of our team, Senior Business Analyst Matt Poole, and Head of Product Pipeline Luke DiRollo, have been acknowledged with merit certification by ALMA – The Asset and Liability Management Association – a membership organisation which provides education and promotes awareness of asset and liability risk management issues through a series of national courses and conferences.

The organisation’s 100 strong membership of UK and Irish financial institutions shares views on areas as diverse as risk systems strategy, structuring of balance sheets to manage liquidity, credit and capital, experience in e-commerce and strategic business direction – all areas where the ALMIS® International team excels.

Joe DiRollo, founder, and MD of ALMIS® International comments:

“Both Matt and Luke have studied for the ALMA profession qualification – the CertBALM – accredited by the Association of Corporate Treasurers.

They both attained CertBALM certification with Merit which, from a continuous improvement and career developmental perspective, is fantastic news for the hard work and diligence shown by Matt and Luke. More widely, however, it further empowers the entire ALMIS® International team’s commitment to reach the highest possible levels of understanding the complexities of regulatory compliance and procedures. This is why membership of ALMA is so important to ALMIS® International.”