Site Overlay

Interest Rate Risk Calculator

The interest rate risk calculator illustrates how risks on future financing costs of your loan portfolio can be calculated. This interest rate risk tool uses the available risk free rate of your country and credit spreads as observed in the market. In this example we use the Solvency IIstandard formula as provided by Eiopa, however we can use other models as well.

Below we apply this methodology to a loan portfolio of a municipality. You can read more about some of the aspects in the article Loan Portfolio Interest Risk. The same proces can, of course, be applied to the loan portfolio of any other organisation.

Please hold on while the application is loading below, and then press ‘Load Sample Portfolio’ to obtain a view on the risks of a portfolio of loans..

If you want to receive more information about our risk reporting services please feel free to contact us. We would be happy to schedule a video call to tell you more about these risk reports, what they contain and how they will help you to get more control over your financial risks.

Assumptions – For this interest rate risk calculator we use publicly available interest and creditspread data as published by central banks. The implied rating is derived by comparing the credit spread paid at the startdate of the loan with the creditspreads in the market at that moment in time. The current credit spread is estimated by taking the current credit spread on the implied rating adjusted for the last known difference between the credit spread on the loan and the credit spread on that implied rating. The methodology to calculate the risks is based on the Solvency II Standard Formula model (version 2020) as provided by Eiopa. We havevalidated this model in the model validation section. The stress parameters for this model are based on long historical datasets and are calibrated every few years by Eiopa against the full history. Correlation is applied between interest rate and credit spread shocks according to Solvency II. For upward shocks 0% correlation is used, for downward shocks 25%. We extend the use of the model to cover longer horizons (4 vs 1 year) and multiple confidence levels (80, 90, 95, 99% vs 99,5%) assuming normal distributions. A 90% confidence percentile means that there is a 90% statistical chance that the risk would not be higher than the calculated level and therefore a 10% chance that it would be higher. A cap on the shocks is applied after 4 years.

Disclaimer – We have made every attempt to ensure that the information contained in the interest rate risk tool has been obtained from reliable sources, that the model is properly applied and that all calculations have been properly executed. We believe this is the best available proxy of the risks based on publicly available data. However errors might occur in the process. Asset Mechanics is not responsible for any errors or omissions by providers of the market data, or for results obtained from the use of this information. All information on this website is provided “as is” and for educational purposes, with no guarantee of completeness, accuracy, timeliness or the results obtained from the use of this information. The information on this website is not intended to be a source of advice or credit analysis with respect to the material presented, and the information and/or documents contained in this website do not constitute investment advice.

©2024 Asset Mechanics. All rights reserved. Product name, products and services are the property of Asset Mechanics.

×