Annual band method

The annual band method is a risk management procedure for banks and is used to determine the capital requirement for securities that are subject to an interest rate risk .

background

In order to guarantee the stability of the banking system and the security of banks' deposits, banks must back their risks with equity. Interest rate risk is a major risk for banks. This arises both from maturity transformation (the bank refinances long-term loans with short-term deposits) (these are shown in the banking book ) and from holding securities and derivatives of different maturities in the trading book . The amount of equity required for the latter risks from the trading book can be determined using the annual band method or the duration method.

With the annual band method, however, only the general price risk (the price changes with the interest rate, which is why one speaks of interest-sensitive securities), not the special price risk.

Basics

First, the so-called net interest positions must be determined.

Net positions are the differences

1. Holdings of the same securities, delivery claims and delivery obligations from spot, futures and options transactions as well as swap transactions that have the same securities as their object of business or that contractually relate to the same securities,
2. Derivative transactions that largely correspond to one another and are aligned in opposite directions, insofar as they belong to the net interest position.

With the annual band method, the net interest positions are assigned to areas according to their remaining term. The areas are roughly divided into a short-term, a medium-term and a long-term zone (Zone I - III). Each zone is again divided into bands (numbered in Arabic):

• The first four maturity bands belong to the short-term maturity zone,
• the following three maturity bands for the medium-term maturity zone,
• the other maturity bands to the long-term maturity zone.

Action

The process of the annual band method is structured according to Sections 300 and 301 SolvV:

• Allocations : The net interest positions are to be entered and weighted in the maturity bands according to their remaining fixed interest period in the amount of their relevant amounts separated by currencies, taking into account their fixed interest rate direction and their nominal interest rate. The weighting is greater for positions with a longer term, since changes in interest rates have a greater effect the longer the term.
• Offsetting within a band: For each maturity band, the corresponding amounts of the weighted net positions with opposing interest rate fixings (balanced band positions) as well as the remaining differences (open band positions) must now be determined.
• Open positions : The balanced belt positions are to be combined to form the total of the balanced belt positions. For each maturity zone the open band positions belonging to the zone are to be summarized separately according to their fixed interest rate direction.
• Offsetting within a zone: For each maturity zone, the corresponding amounts of the open band positions with opposing fixed interest rates (balanced zone positions) as well as the remaining differences (open zone positions) must be calculated. The open zone positions of all maturity zones are to be determined individually, taking into account their fixed interest rate direction.
• Offsetting across the zones: The open opposing positions in a zone are offset against the other zones. The open zone position of the short-term zone is offset against the open zone position of the medium-term zone, the remaining open zone position of the medium-term zone with the open zone position of the long-term zone and the remaining open zone position of the long-term zone with the remaining open zone position of the short-term zone.

In short, the process consists of four steps:

1. Assignment of the positions to the bands and weighting,
2. Offsetting of opposing positions within a band,
3. Offsetting of the still open positions across the bands within a zone and
4. Offsetting of the remaining open positions across the zones.

Offsetting in and between the bands

The closed positions within a band are to be weighted with 10%. The positions offset within the first zone and thus closed are to be weighted with 40% (in the second and third zones with 30%). Offsets between the first and second zones must be offset at 40%, as well as offsets between the second and third zones. If positions from the first and third zone are offset against each other, the closed position must be weighted with 150%. All positions open at the end (after all possible offsets) are to be weighted with 100%.

Others

The SolvV provides for a further breakdown into two interest rates. The interest range A includes all positions with an interest rate of less than 3%, the range B all with an interest rate of at least 3%. The bands are then divided into two again.

Legal norms

The legal framework for the annual band method is provided by the ordinance on the adequate capital adequacy of institutions, groups of institutions and financial holding groups . Sections 300 and 301 are decisive here. The BAFIN announcement of July 20, 2000 (BAnz. No. 160) on Principle I on the institutions' own funds is also relevant. Section 21 is relevant here.

swell

• Thomas Hartmann-Wendels; Andreas Pentecost; Martin Weber banking apprenticeship 4th, revised. Ed. - Berlin; Heidelberg: Springer, 2007, p. 642 Table L2-15.

Individual evidence

1. ↑ § 21 BAFIN announcement on Principle I ( Memento of the original dated December 11, 2006 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice.