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Determination of Interest Contributions and Net Interest Margin Contribution

In their traditional core business – the lending and deposit business – credit institutions are subject to the special feature that they achieve margins both on the purchasing side (deposit business) and on the sales side (lending business). Although the deposit business always only generates costs from an external perspective (let’s disregard negative interest rates for the time being), it regularly generates positive margin contributions if the market business is passed on to the treasury at internal reference conditions.

Differentiation between Net Interest Margin Contribution & Maturity Transformation Contribution

A distinction must regularly be made between the two sources of the interest margin: the net interest margin contribution and the maturity transformation contribution. Both earnings components are currently the focus of special attention. On the one hand, the low level of interest rates means that the net interest margin contribution is only a limited source of permanent and reliable margins without at the same time over-expanding credit risks. On the other hand, while maturity transformation is a classic economic function of credit institutions, it also entails considerable risks when interest rates rise, which should not only be monitored and limited internally, but also be the focus of the supervisory authority. Regulatory requirements, such as the IRRBB on the one hand and accounting requirements, such as BFA 3 on the other, focus precisely on these risks and their determination. Both actual and planned figures for both types of contributions must also be made within the framework of the financial regulation, FINAV.

Change in the Maturity Transformation Contribution

While the net interest margin contribution generally does not change over the term of a transaction, it must be nonetheless recorded accordingly when the transaction is concluded or modified, and the maturity transformation contribution can change regularly both with a change in the interest rate level and with a change in the refinancing structure. In addition, the transformation contribution regularly faces the challenge that it is generally not determined on the basis of a single transaction, but rather on the basis of a portfolio analysis.

FAS AG Support in the Determination of the Interest Contribution and Net Interest Margin Contribution

FAS AG supports credit institutions both for internal controlling purposes and for regulatory reporting purposes, e.g. within the framework of FINAV, in designing and determining the maturity transformation contribution and the net interest margin contribution. In this context, our experts provide support both in the design of the methodological determination for the individual financial products and in the design and implementation of processes for the regular and high-quality determination of corresponding contribution metrics.

If you are interested or have any questions, please contact us.

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 Andreas Huthmann Managing Partner