Margin calculation in a zero interest environment


For Stadtsparkasse Düsseldorf, customer deposits without a contractually fixed interest rate represent a key source of funding. These especially include the money market accounts commonly referred to as “instant access savings accounts”, traditional savings deposits, but also transaction accounts for retail and business customers. In light of the financial crisis and zero interest rate environment, the institution has seen significant inflows especially in the area of money market and transaction accounts. The existing calculation model, however, has not proven to be responsive enough: without a correction mechanism which considers the effect of volume inflows on the current (low) level of interest rates, there will be incorrect results in determining margin contributions and thus the splitting of the net interest income of the overall bank. To avoid generating the wrong management stimuli, Stadtsparkasse Düsseldorf thus decided to expand its internal management systems. In a joint project with zeb, the concept of a dynamic replication portfolio was implemented based on a corresponding module from the zeb.control product family.

1. Systematic: the implementation

The method of moving averages is not only used by the S-Finanz association as the foundation for mapping variable customer contracts in calculation and risk management. For determining margins, this method requires the approximation of interest rate adjustment behaviors and maturity assumptions by means of a calculatory formation of tranches. Volume consistency is implicitly assumed in the basic concept. Without integrating effects of possible volume changes, misinterpretations regarding the corresponding product success can occur: Especially for inflowing new business in the current zero or even negative interest rate environment, margins are determined based on rates much higher than what banks can achieve on the money and capital markets. The following applies for the general interaction between changes in volume and changes in interest rate level: the more that volume increases accompany interest rate cuts, the lower the actual realizable money and capital market opportunities will be compared to values purely calculated based on moving averages. In extreme cases, a profit can be reported despite the actual contribution to the overall bank performance being negative. To rule out this risk, Stadtsparkasse Düsseldorf decided to implement a form of margin calculation equal to the methodology in interest exposure book management while taking volume changes into account. The concept of dynamic replication was decided on partly due to the fact that it allows a periodic (i.e. P&L-compatible) determination of margin implications in case of volume changes.

"Dynamic replication" calculation process

2. Effective: the results

An expansion to the management landscape is necessary for the corresponding technical implementation. The requirement was first for a solution to be integrable into the data landscape and system environment of Finanz Informatik. This allows systems and processes from the S-Finanz association, which are established inhouse, to still be used as part of data generation and result utilization. Furthermore, there was the requirement to be able to still draw on standard software, which is developed based on an appropriately quality assured process and allows a semi-automatic data integration. With the corresponding zeb.control module, these prerequisites could be completely fulfilled. During the project work, which lasted approximately two and a half months, the software, interface and process management were initially set up within the Sparkasse and Finanz Informatik infrastructure. Afterwards, necessary volume and yield curve histories were built and the generation process for monthly updates of relevant product data and interest curves was structured. As part of the specialist support, basic trainings in handling were held, product customizations according to institution-specific requirements and prerequisites were conducted and the parameterizations required for regular calculation, in line with harmonized interest rate risk management in the banking book, were defined. Finally, the calculation results were jointly validated and measured and the responsibilities and process steps as part of the integration into the management process were coordinated and documented. Based on the contract components, volume developments and market data from the OSPlus data warehouse, the zeb.control module determines in regular, monthly calculation runs the de facto money and capital market opportunities of variable customer contracts for Stadtsparkasse Düsseldorf. These results are then returned to the data warehouse of the savings bank. This allows product-related margins to be determined and the related sales controlling to take place by means of established support from the S-Finanz association.

3. Future-proof: outlook and conclusion

With the completion of the project, Stadtsparkasse Düsseldorf was able to achieve its central objectives: after the technical and business implementation, an approved standard software is now available which is integrated into the infrastructure of the data center. Based on this, a valuation of the profitability of major deposit products can be made in light of the actually realizable money and capital market rates by Stadtsparkasse’s treasury management team. Especially in the current interest rate landscape, this is a major prerequisite for properly setting incentives in sales and thus for avoiding raising funds based on unjustified customer conditions. The compatibility of calculation results with period oriented margin management offers major benefits in communication. Results from the dynamic replication portfolio will initially be used as part of post-calculation, sales management and overall bank planning in particular. Possible further developments include conceptual detailing, regarding how simulation options can be used in the pricing process and in setting conditions.