Asset Liability Management & Interest Rate Risk in the Banking Book - Part 4 of 4

Speaker A: Hi everyone.

Speaker B: I'm back with Eric and uh, what started off being an overview of managing risk in the banking book of business has now become an overview with various and multiple deep dives. But in the short conversation before with Eric, I said so that we're now in part three, that we're going to do our very, very best to bring this home so that it doesn't become um, an endless series of rabbit holes. So uh, with that weird introduction, Eric, I'm going to have you bring us up to speed to where we are and we're going to try to make this more of an overview and we're going to try and have less rabbit holes. Over to you Eric.

Speaker A: Thank you guy. Um, as always, a real pleasure to be back. Um, so I'll kick start right in and maybe just quickly walk through this example again because that's going to be the uh, the starting point for very much um, of the rest. So looking at assets and liabilities on this entire balance sheet, we're going to reduce it to a very, very simple balance sheet by ignoring everything except for the fixed rate loan and the site deposit that's funding this. And the way we then put this on a GAAP profile, and GAAP profile here means from a net interest income perspective, um, there's going to be a second one from an economic value perspective later. But what we plot is on the vertical axis the notional amount, and on the horizontal axis we plot when these items reprice. So when the interest rate resets, the fixed rate loan has a fixed rate of 2.5% fixed for the next 10 years. And the site deposit has a three month, we can also say a term deposit if we want for three months it's fixed at half, uh, a percent. So we think we'd make 2% for the next 10, 10 years on this. But then if rates rose, we'd actually lose, uh, money because now in three months the liability is going to reprice. And in this example it goes up from half a percent to 3%. So now we're paying 3%, but we're still earning only 2 and a half percent on the customer loan. So now instead of making 2 and a half percent what we thought before, we're actually losing half a percent per year over the next 10 years if rates don't move anymore. And in this example the yield curve shifted in a parallel way up. Um, that wouldn't necessarily need to happen. It would be enough if only the short term rate. So this three month rate rose and the long term rates didn't move. So you would have essentially an inversion of the curve. Um, and the problem here is that the customer loan doesn't reprice. Even if you had a parallel move, then it would be fine again. And if it repriced, because then your 2.5% customer loan would reprice at a much higher level and you'd still have the same margin. So it's this difference in repricing frequency or the repricing gap, hence GAAP profile that's a problem here. Now a very simplistic way to get rid of this risk is if you match fund your exposures. So the 10 year customer loan is funded by a 10 year liability and they both reprice in 10 years. And then the customer deposit, for instance, you would park that money at the central bank and you would earn a central bank rate on it. This looks or looks fine and well in theory, but actually it's not going to work in practice because for one you will not be able to match fund every customer loan. So you have to issue a bond for every single customer loan. Ironically that's what happens in Denmark. So every mortgage has a bond issue issued, um, and then there's mortgage auctions, but that's a very peculiar housing uh, market. Most global markets don't work like that. Second point is, if a normal bank were to issue one to one loans for customer loans, generally the rate that the bank pays will be higher on own issue debt than what the mortgage uh, taker is taking. So that wouldn't be economical. And then also if you take customer deposits and you park that cash at the central bank, there's lots of little money if you will, um, because you could earn on the term transformation if you use that money differently. So instead of doing match funding, um, we're going to get rid of the interest rate risk by using interest rate swaps and we'll actually get completely rid of the interest rate risk, um, but without having to resort to matched funding. And the idea here is we're receiving a fixed rate on the customer loan and we're paying a somewhat floating rate on the customer deposit, which depends on what the current market rate is. Now when we do that, if we take an interest rate swap and there's two types, there is a payer swap and a receiver swap. Paying and receiving, that's always as a function of whether you pay or receive the fixed rate. So a receiver swap for instance, will mean you receive the fixed leg and consequently, uh, you pay the floating one. And the payer swap means you pay the fixed leg and then you receive the floating leg because you always swap a fixed versus a floating interest rate. And with this setup, if we receive a fixed payment from the customer on the loan, we're going to pass on that fixed payment minus a margin to the interest rate swap counterparty. So we lock in a margin and then we receive the floating interest rate on the floating leg of the swap. And then we can pass that um, on to the, to the customer on his deposit or her deposit. And now if short rates move, so if the customer expects to get more payment on the deposit, that's fine because actually we receive more on the floating leg of the interest rate swap. And so this moves in tandem. And if the funding going back to this example, if the funding gets more expensive, it goes up from half, uh, a percent to 3%. It doesn't matter because we are also getting more, we're paid more on the interest rate swap, so there's a higher income. And then in 10 years, um, this will also perfectly match because the customer loan is going to, is going to roll off. And at the same point in time the interest rate sw, uh, is also going to roll off.

Speaker B: Eric. So match funding would be prohibitive such that the bank, at least in this business, is not profitable. What is the approximate cost of, would be in this example, the approximate cost of a floating rate swap. And who is the counterparty?

Speaker A: Counterparties will be different banks. Um, and you can also, there's lots of different counterparts. You can have pension funds, um, or the buy side actors. It really depends on their business model and their risk appetite for rates. It's difficult to pinpoint specific counterparties. Banks will generally be, uh, active on both sides of the market. And then if you think about airlines and oil producers, that's easier. Oil producers, they will want to hedge commodity prices against drops in oil prices. And then airlines, they will want to hedge against rises in the kerosene price. So there is a natural offset between or a natural long and a natural short side in that market. In interest rates, it depends a bit on the environment and it depends on the type of institution and what business they have. So for instance, if banks have more fixed rate lending, they would want to hedge this fixed rate lending generally with um, these payer swaps.

Speaker B: Could you say that the bank in this case is long interest rate, short term interest rate risk, it wants to offset offload? You wouldn't use those terms?

Speaker A: Not directly.

Speaker B: Yeah. So the trader who's having a conversation with the counterparty from which he's paying fixed rate to receive floating rate. Is he laying off risk? Is he, he's just buying, he's, he's buying an interest rate swap?

Speaker A: Basically, yes. Could be both. It can be a hedge fund that has a view on what rates are likely to do in the future, so they will take an open interest rate position. But it could also be another counterparty in the market who happens to have the opposite position of this bank and just wants to close that risk.

Speaker B: And um, I think we talked about the OCC Options Clearing Corporation. Options that used to be over the counter are not anymore. Is there a central counterparty that one can use?

Speaker A: Yes, uh, and you have to use it. Uh, interest rate swaps fall under the mandatory clearing obligation and the vast majority of the market is cleared in um, lch, so London Clearinghouse Swap Clearing.

Speaker B: So the counterparty is not some bank, it's the clearinghouse. It's a AAA rated guarantee.

Speaker A: When you trade in general it will be a bank, a uh, hedge fund, a pension fund. But then if that institution also falls under the clearing obligation, then immediately and automatically that trade will get novated to the central counterparty. So while originally you were a counterparty to the hedge fund, let's say um, this leg gets broken up and both of you become counterparties, um, to the ccp.

Speaker B: And the central clearinghouse is expecting both sides of the trade to meet their obligations. And if they don't meet their obligations, they don't have claims against each other. The central clearinghouse has either claims or payouts to make.

Speaker A: Exactly. Yes. It's the risk management of the central clearing central counterparty that uh, needs to manage or account for the risk that one of the two counterparties might fail and then the CCP needs to make the other party good on the obligations.

Speaker B: What's the notional value of um, interest rate risk that is outstanding at any one time? Do you know?

Speaker A: It's in the, I think it's in the double digit trillions of dollars.

Speaker B: Right. And just say the US economy, the size of the US economy is about 3, 30 trillion if I'm not mistaken.

Speaker A: Equity markets in principle, these 100 trillion interest rate swaps could have a market value of zero because the market value is simply given by the difference of the net present value of the fixed leg and the floating leg.

Speaker B: They're all offsetting each other. But it gives us just a sense of the size, the volume of transactions that are taking place. And do you know what, what the daily notional volume that's traded?

Speaker A: I don't.

Speaker B: Um, but you, you could Say you know, probably those renew like every 365 days. So you could take the 100 trillion number and divide by sort of 360 or so to get the daily volume.

Speaker A: Approximately most 5 and 10 years are quite frequent. 10 as you can clear up to 30 and even 40 years in some currencies.

Speaker B: Wow.

Speaker A: It gets less liquid at these long maturities. But um, it's very liquid market up to 10 years.

Speaker B: But it's always a counterparty. It's not so liquid that you can trade in the market without knowing who the counterparty is or can you?

Speaker A: Uh, depends on trading platforms and it also depends on the volume. If it's a really large volume, you could have over the counter quotes.

Speaker B: Yeah, yeah. And by uh, how much does this reduce the, you know we haven't talked specific numbers but obviously the market is way better. Uh, I mean this effectively this synthetically creates match funding for the in a sense.

Speaker A: So you, it, it removes, it removes the interest rate risk. So for this I think was 175 million loan, you would have 170 million notional interest rate swap. And that completely removes the interest rate risk. And that's the difference also between the market value and the notional value. The customer loan, we've given the customer 175 million in cash as a loan. The interest rate swap at inception it's got a uh, notional value of 175 million but the market value of that is zero because at inception generally you, you set the. So you have, you have the yield curve and you have an anticipation of how rates are likely to invol to evolve. And that gives you the floating leg in anticipation of how the floating leg is going to evolve. And then you, you discount these cash flows to the present. So you get an estimated net present value for your future cash flows. And then you set the fixed leg. So the swap rate, you set that as a level such that it equals the expected net present value of the floating leg. And then you have two exactly offsetting values. And if rates now go down, then you still, in this case, if we pay the fixed leg but rates go down, then we still pay the same fixed uh, amount but we will receive less on the floating leg. So then the net present value of the swap has gone down. We've made a loss. Conversely, if rates go up, we still pay the same fixed amount but we will receive more on the floating leg. So we've made a gain, I mean

Speaker B: in terms of uh, net interest income and um, eve economic value of the equity. Once You've put that swap in place, you should be neutral. Those two shouldn't move at all to interest rate moves. They should be zero.

Speaker A: Basically from a net interest income perspective they will reprice at the same time, um, as the loan for instance here, um, and also as the deposit. So they're neutral. From an EV perspective it's also true if you fair value everything. Um, and that's we're anticipating essentially what's called hedge accounting because the interest rate swap will always be fair valued but the customer loan will be accrual accounted so it will not be fair valued. And then you need to have um, you need to create what's called a hedged pair, um, and also fair value the customer loan. But maybe we'll get to that in the hedge accounting.

Speaker B: Yes.

Speaker A: So another thing that you can also do in addition to hedging with interest rate swaps is hedging with your deposits and in particular by term, what's called non maturing deposit, term out or replication. So if for the 10 year loan, say we had a 10 year fixed term deposit, that would again be matched funding and then you've removed both the interest rate risk and the liquidity risk. That's maybe one thing to add here. We've removed the interest rate risk but we haven't removed the liquidity risk. If the customer comes and wants to have the funds back then we still need to pay the customer. So from a liquidity perspective there is still risk here, but from an interest rate perspective it's gone.

Speaker B: Yes.

Speaker A: And uh, deposit replication or non maturing deposit term out means that you assign and you model a duration for deposits that don't have a duration essentially or they have a contractual overnight duration. You can take your money at any point in time and the bank has to refund you. But then the bank knows that behaviorally customers um, don't do that. The money is going to stay there for longer. And so you model what the behavioral um, duration of these deposits and that then by then setting up such a model and then essentially placing these deposits with their modeled um, duration onto this ladder you get partial hedges for your assets and there's regulation and requirements around how long you can term out. So you, you can't for instance say you've got a 20 year loan and you're going to model your deposits to also have a 20 year um, duration and then it's offsetting um, regulations put a cap, I think EBA in Europe they put a cap on five years for the weighted average duration of your term. Out. So you cannot assume that the average of all of your deposits have a longer duration in five years. And there's lots of modeling requirements, uh, model validation requirements on testing these assumptions. And by way of doing that, then you essentially reduce the amount of interest rate swaps that you would need to put in place to hedge. You were saying something.

Speaker B: Yeah, sorry. That doesn't take into account when the modelers come into the boardroom and say, holy moly. Um, uh, deposits are flowing out at a lot faster rate than we ever expected. Like Silicon Valley bank, which was modeling a steady state, not a stress situation. I guess same with Credit Suisse, where suddenly, and there's no reason to, but people are like, gert, thanks. It doesn't matter what amount of money the bank's willing to pay or what other ways in which they're willing to offer better terms. People are taking their money out at a huge rate. So the modeling should be looked at. It's strange, um, bank of America, during the Silicon Valley bank crisis, received deposits and other banks didn't receive deposits. So exactly how your, uh, deposit risk changes in a stressed environment is not clear to me.

Speaker A: So the modeling requirements will generally be limited to interest rate risk. And how do deposit volumes change as interest rates move? In stress testing, you would then also look at bank run risk, essentially, but that's more of a liquidity risk, which has repercussions on interest rate risk because the deposits you thought were there and you could use to hedge loan books are suddenly gone. But that would generally not be or not fall under the modeling scope of business as usual. Interest rate risk management.

Speaker B: Yeah, yeah.

Speaker A: So then key rate duration, that's. We're now moving towards the economic value perspective. So there's a way we can turn the gap profile into a sensitivity profile. And what kro1 so key rate duration01 is for one basis point actually tries to measure is what's the change in value of whatever product you're looking at if the interest rate was bumped by one basis point at a specific tenor point. And how this is done in practice, I've just put down an example of finitely many cash flows. So you write down your cash flows, CI over the different time horizons, RI is the rate that applies there, and then M M is uh, the number of annual periods. And then what simply happens is at time point K, we're going to bump, um, the interest rate so the discount factor changes by one basis point. And then look at the impact on the valuation. And if you do that for all the different Maturity steps, you get what's called $value 01, DV01. And there is a simple rule of thumb that many use. Essentially you take the notional of the loan or the interest rate swap, you multiply it by the maturity of the position expressed in years. So it can be one, two years or half a year 0.5 and divided by 10,000. It's a rough approximation, but it actually works reasonably well. And that gives you the sensitivity of the position. So if for a parallel shift of one basis point, let's say you've got a one year $10,000 loan, if you then bump the rates by one basis point, you have 10,000 times one divided by 10,000. So the dollar value of that loan is going to be the uh, DV one of that's going to be $1. Simply.

Speaker B: Can you. So, so, uh, let's go back to the previous example and let's calculate the DVO one for that. Yeah, that one, for example.

Speaker A: Let's maybe let's. Yeah. So we're going, we're going to do it here. Um, on the left side we've got the gap profile. So time is on the x axis. That's the same for the gap and the sensitivity profile. And then on the Y axis we have the notional here. So that was 175 million.

Speaker B: Yeah.

Speaker A: And if we now go to key rate duration, there's a, you can see the, the graph flips. Why is that? Uh, because on the left side we're showing assets and liabilities, and assets have a positive value and liabilities have a negative sign. On the right side, when we talk about sensitivities, we talk about how are these assets and liabilities going to react if interest rates increase by one basis point. So if we take the customer loan, it's got a fixed rate for 10 years. And um, if rates increase by one basis point, then all else equal, we would want to charge the customer by one, uh, basis point more. But because we can't do that, it's fixed. We've actually made a loss equivalent to that one basis point. So that's why it's negative. Negative means we're actually losing economic value. And the fixed leg of the interest rate swap, where we are paying a fixed rate. Now, if rates go up by one basis point, we're still paying the same fixed rate. So economically we've made a gain and that gain is exactly offsetting the customer loan. And um, if we then calculate the DV01 of that, then you'd have 175 million times 10 years divided by 10,000, that would be the rough sensitivity of that customer loan. Or with the opposite sign, the interest rate swap.

Speaker B: I don't have a calculator in front of me. What does that work out?

Speaker A: I have to take a calculator. I'm a terrible method.

Speaker B: What's that?

Speaker A: 175,000, I think.

Speaker B: Yeah. So just go back one slide. So sorry. Key rate duration. Um, so you, first of all, you're bumping up the interest rate in just one part of the yield curve. Did I get that right?

Speaker A: That's the key rate duration at a specific tenor point. And then what I tend to call DV01, that's the key rate duration summed over the entire yield curve. So there you assume that you're bumping the entire Yield curve by 1 basis point.

Speaker B: By one basis point.

Speaker A: Parallel shift. Yes.

Speaker B: Okay. And then, and then you're calculating the revalue of the portfolio.

Speaker A: Yes.

Speaker B: Uh, uh, based on. But you, you. In, in, in the example we've given, you've got four different instruments that you're effectively revaluing. You've uh, got four. You're revaluing all four of them.

Speaker A: Basically, yes.

Speaker B: And uh, and sorry to understand. So I understand what's going on the left hand chart. I don't understand what's going on on the right hand chart. Why the blue and the green are larger.

Speaker A: It's essentially this format. The longer. If you have. Let's.

Speaker B: Well, let's just stay there. There's something else. So on the middle you've got the sum of all the different tenors, what happens over all the different tanners. And then at the bottom you've got a rule of thumb. Um, which is not. It doesn't seem related to what's in the middle, to the equation in the middle it is.

Speaker A: So here, here you're summing over all tenants, but nothing happens at all the tenant. Except at point K where we bump it by right by one basis point. And at, ah, the bottom, what you would do there is you've got a second sum that sums over all the different case. First you would bump the very first tenor, the second, the third.

Speaker B: Right. So you're running it at least ten times for ten years. For example.

Speaker A: Exactly.

Speaker B: And you could. And that's discrete, not continuous. But then, but then you just come and said that, that that's what it's going to be equal to. But how do you know that? So that's a rule of thumb. It's not an actual calculation on A particular portfolio?

Speaker A: No, no. If you, if you simplify, if you simplify these terms, you can see that actually simplifies roughly to um, this expression for all.

Speaker B: Is that the case for all different. I mean we're taking one specific example. There could be many different kinds of balance sheet.

Speaker A: This is just cash flows.

Speaker B: So. But you're saying that equation in the middle simplifies the equation on the bottom?

Speaker A: Not exactly, but roughly.

Speaker B: Roughly. Oh, wow. Okay. You're going to show me the math for that sometime. We don't have to do that now. Uh, do you have that in the appendix?

Speaker A: Uh, non, depending. But I can, I can I have it. I did it previously.

Speaker B: So the DVO1, just to name the DV01 in English, is the dollar value

Speaker A: of a basis point.

Speaker B: The dollar value of a basis point move.

Speaker A: Yes.

Speaker B: Is just related to the number of years and the notional value of the portfolio divided by 10,000.

Speaker A: Yes, it does depend on the interest rate level. So if you're at 5%, a 1 basis point shift there has a different impact than if rates are currently at 1%. So if you move up to very high rates or very low rates, um, there's going to be a difference. And this approximation won't be exactly true, but for your rough estimation and looking at a portfolio, this actually does an incredibly good job.

Speaker B: Wow, I'd love to see the maths for that. So explain briefly how this relates to value at risk.

Speaker A: So value at risk is a quantile of a loss distribution. So you'd need two things. DVO one. Here is your, is your sensitivity over the whole yield curve. So let's simplify and forget about the different tenor points and say we, we have a bullet loan with one single payment at one maturity, then the DVO one is equal to the KRO one at that point in time because there's just this one single, uh, payment. Um, then the sensitivity of if, if we take this example again, um, we'd have $175,000 sensitivity per basis point shift in and we assume there's no payments. This is just one single bullet payment at the end. So we've given the loan today and we know that for every 1 basis point parallel move of the yield curve, we will gain or lose $175,000 in economic value. Um, in order to calculate a value at risk, then what we would need is a distribution of how rates actually change.

Speaker B: Right.

Speaker A: And if you then know that, so you get this type of bell shaped curve for how rates move and you quote unquote, Multiply your sensitivity so the 175,000 with the amount of, of rate moves. That will transform, uh, your bell curve of rate moves into a bell curve of profits.

Speaker B: Yeah.

Speaker A: Um, and losses. And then you take a quantile of that.

Speaker B: The dollar value at risk doesn't, doesn't, um, imply any expectation of what the probability of interest move is. No, it's value at risk has got an implied probability of what the interest rate move might be.

Speaker A: Yes.

Speaker B: Yeah, got it.

Speaker A: And you need a distribution. You need a distribution of market moves. And then you can say, given this distribution, there is a. If it's a 99% value at risk, then you know that there is only a 1% chance that my loss is going to be larger than X.

Speaker B: But the value at risk is embedded into, into it and a, uh, distribution of what's likely to happen.

Speaker A: Yes.

Speaker B: Based on past information. Whereas the dollar value, uh, is just a mechanical thing. It's saying how sensitivity.

Speaker A: Yeah, yeah, It's a sensitivity normalized to one basis point.

Speaker B: Right. But that's one hell of a. That's one hell of a rule of thumb. Yes. That's, uh, if it's that powerful, you know, that, that I would imagine. Well, it, it's, it's a very nice thing to give to somebody who's in the boardroom because you can just go, okay, this is kind of like when, when this lever moves, that's how much the needle moves, you know?

Speaker A: Exactly.

Speaker B: Yeah.

Speaker A: Yes. And then from a notional perspective, the loan, the swap, and the other leg of the swap and the deposit were exactly the same. But from a sensitivity perspective, there's a big difference between the two. Uh, why is that? Well, because here we've fixed the interest rate for 10 years. So if rates go up by one basis point, which is what the DV01 profile assessors, then we said that's a loss of $175,000 per basis point. And that's because rates have gone up, but we're still receiving the same fixed, uh, rate for the next 10 years. That's, of course, a larger loss than rates go up and we receive one basis point more. But we only receive it for the next three months.

Speaker B: Yeah.

Speaker A: And then we will have to pay, um, for the next nine years and nine months we will have to pay more. So the difference between the orange bar gain here and the green bar loss is precisely this, uh, nine years and nine months where we would have to pay more on the customer deposit because it's repriced in comparison to the customer Loan which hasn't repriced yet. So the same notional, if notionals are constant then the sensitivity will simply increase linearly uh, with time. This is a gap profile for a bank, a realistic gap uh, profile I would say for a bank that runs predominantly fixed rate lending. So that would be continental European banks like Germany, Switzerland, um, they have lots of fixed rate loans. It would be slightly different for Scandinavian banks for instance which have more uh, short term loans and less fixed rate lending. What you can see on the top in green you've got maturing products. So that will be your lending book. On the bottom, non maturing deposits. And then I've added a couple of swaps that then hedge um, this interest rate risk. And there's also maturing products in green. You can see a little point here. At the ten year point, uh I've put bond issuance. So the bank is financing itself with debt issuance and that's also a maturing product. Now uh, from an interest rate sensitivity perspective, there's more liabilities that reprice in this balance sheet overnight one and two months. So if rates go up because we have more liabilities repricing than uh, assets repricing, um this bank is sensitive to interest rate increases because it will have, and let's assume if rates go up you will have to pay more. The amount that you have to pay more is equal on assets and liabilities. Then by virtue of simply having more liabilities repriced short term your funding costs are going to go up proportionately more than uh, your revenues are on the assets. So this bank is sensitive to rate increases in the short term.

Speaker B: Is this an actual bank?

Speaker A: No, it's a made up bank. Yeah, but it's a realistically looking one.

Speaker B: But you would do this kind of work inside any firm that you work at? Yes. Producing these kinds of charts?

Speaker A: Yes, that's what you'd look at uh, uh, at a daily basis essentially and

Speaker B: using these charts to make decisions on whether to enter into the swap market or not or find other ways to hedge out future. Yeah, so I'm stealing your thunder I think is the word.

Speaker A: And the bottom chart shows the set. It's exactly the same balance sheet but it's from an economic perspective and that's what the bank will generally manage the balance sheet towards. So if we look at the long term funding, the 10 year point here, which was essentially invisible on the previous graph, that's driving a quite substantial amount of the interest rate risk from an economic uh, perspective. And you can see here that the bank it's fully hedged the bond issuance with the swap. And then you can see that this bank for instance would term out the majority of its non. So non maturing products is predominantly non maturing deposits and that's what you see here. So this bank has essentially got a model that models deposits out to five years and then there's a bit of uh, a residual and this is used to offset or to hedge the mortgages and loans on the liability side. And then in the six to nine year buckets where the bank says we don't think it's prudent to model customers deposits at higher tenors, the bank would then go into the swap market and hedge it and you can see it's slightly under hedged value perspective. So the KR one in the different buckets here is negative. So from an economic value perspective the bank is also sensitive to rate increases, but that's driven by the longer tenors rather than the um, short term tenors here.

Speaker B: Do you think this hypothetical bank is right? It feels to me like the model in orange. What is modeled in orange on the lower chart, the drop off between euro 5 and 6 seems unreasonable to me. It's unlikely to be the actual case. They seem to have a lot of confidence in what customer deposits will do over five years. And then they're just saying yeah, and year six they all leave. They probably won't all leave.

Speaker A: No, um, yeah, it's not really that they, that they leave but you assume that they're not. So you've, you've got a runoff rate for the deposits and you assume that it gets a bit technical but in a sense you assume that they don't have a duration of more than five years.

Speaker B: It's conservative way to model the deposits, but I'm sure that's not the actual behavior of the deposits. No, but in a sense you bring the banks, the goal is to bring the line, the black line, as close to zero as possible, basically.

Speaker A: Um, so if you want to get rid of the interest rate risk completely. Yes. Then you need to get the black line as close as possible to zero. And, and that's what, what interest rate risk in the banking book then, then will set bounds on, so the second line, the risk function will say our risk appetite for interest rate risk is X which then essentially sets a corridor around zero for how much the banking book or the, the, the, the treasury function can play around and, and, and if they, if they have a view. So if you know, not, not every mortgage that's issued and that adds up to the green bars here is going to be immediately hedged with, uh, with a new swap. So you might build up interest rate risk. And then at some point you say, okay, this is how, when, when looking at, um, at the swap market and their prices, actually it's cheap now to hedge this. So then you go and execute swaps, or you say, maybe it's not cheap, but you're actually, you're taking too much interest rate on too much interest rate, so you go and close it anyways. Um, and that's what, what the traders in treasury generally do, they manage the interest rate risk profile, um, of the entire banking book.

Speaker B: And from a board or from a regulatory, um, standpoint, as long as you, at least you're measuring it, a good start is just to know what it is and to get it reported.

Speaker A: Yes.

Speaker B: Excuse me, I'm, um, for everybody's interest. I'm, I'm, I'm, I'm suffering from a slight cold that uh, a quick, quick moment of, um. So do you know why women have pain in childbirth, Eric?

Speaker A: Uh, yes, it's, well, partially. I think it's because, because we're um, walking on two legs. So the evolution has reduced the size of the um, Pelvis such that your organs don't m. Fall through. Um, but that makes it very painful, um, to give birth.

Speaker B: So that's a good scientific answer. The actual answer is, um, uh, women have pain in childbirth. In order to understand how much, how difficult it is for a man to go through a common cold. Tell that to your wife. She'll enjoy it.

Speaker A: Yeah, I'm sure I'll survive that joke.

Speaker B: Yeah. You're not sure you survive exactly. Maybe not. So then beware telling that joke to your wife. But this is kind of daily bread and butter for you, is that right? Um, in your daily work as a risk manager basically is in a way getting the most accurate possible measure of the gap profile, the interest rate profile, and pointing out where there are mismatches. So the guy who was doing that job at Silicon Valley Bank.

Speaker A: Yeah, I'm not sure where he is. Um, at Silicon Valley bank, what essentially happened is they had a large negative overhang. So you had lots of maturing products. The treasury, um, and we'll get again to Silicon Valley bank to wrap up later. So you had a negative DV01. You were sensitive to rate increases and then rates did increase and you lost economic value. So these were non unrealized losses as we talked about initially, um, because the positions were, um, not fair. Valued. But then as the deposits left and the bank essentially had to sell or repo these um, securities to match these outflows, then your unrealized losses become realized losses. So it is relevant to look at your economic value, which essentially pretends that all of the positions are fair valued.

Speaker B: Yeah, uh, both are important. You have a beautiful slide coming up that um. Go on, talk us through it.

Speaker A: Just to show why it's important also to look at different tenors. I've, I've set this up in a somewhat comical way. So the DVO1 of this book is zero. So if you just looked at the net figure, you would say, okay, this bank is perfectly hedged from an interest rate perspective, which is true if interest rates or the yield curve would only move with parallel up and down moves across the different maturities. But the bank here is sensitive to um, rotations or yield curve risk. It's also sometimes called meaning, um, if short rates increased, so rates between two and four years and longer term rates decreased. So essentially you have a flattening of the yield curve where short term rates go up and then longer term rates go down. The bank would get hit on two accounts because it loses economic value in the two to four year bucket and it also loses from the rate decrease in the five to seven year bucket. One of the two moves would be enough. So if short term rates increase or if long term rates decrease, either would hit the bank. It's only neutral if rates literally move in tandem. And that risk only gets picked up if you look at the different tenors.

Speaker B: So talk us through this. Uh, talk us through first of all the blue, the orange and the gray before we get to the yellow. As if you're presenting this, let's say you're presenting this to the board. And obviously something needs to be done in the two to four and the five to seven year, uh, tenors. How would you talk them through it?

Speaker A: So this then depends on your risk appetite. If, let's say you're within risk appetite, then this would mean that the banking book takes a view that um, rates are likely to. The yield curve is likely to steepen. So you expect that long term rates will go up a little bit and you expect that short term rates will go down a little bit. Because if that happens, then you have a gain, uh, on these two accounts. But if the reverse happens, if it flattens rather than steepens, you have the loss. When you talk to the board or to senior management, um, and obviously this would be checked on a daily basis that such a position is within the risk appetite and within the allowed confines of what's set by the risk appetite.

Speaker B: But I just want to make sure everybody understands and I understand obviously. So first of all, netdvo1, the yellow line, this is defined as zero. If you were to sum all the different tenors out, you would get the negatives equal the positives and therefore the DV01, uh, number that you gave is a zero.

Speaker A: Yes.

Speaker B: So now just briefly, I know that we've covered it. So if we just go to the two to four year tenors where that yellow line is negative, take us through the mechanics of what's going on in rising and low and declining interest rates.

Speaker A: So if rates rise between two and four years, so that wouldn't happen in two or four years. But if today the two year, three year and four year rate increased, there would be a economic uh, loss here and that would be because you're not balanced. So you've got more loans. So let's take the three year as an example. You've just issued a three year loan. So for the next three years you're going to get an interest rate of X. But now interest rates today the three year interest rate has gone up by half a percent. And then you go, shoot, actually the loan I just issued, I should have issued it for half a percent more than I just did. And that half a percent more that you should have issued it for, that's your economic loss.

Speaker B: So the reason why that's negative is that if interest rates were to rise on that part of the interest, uh, rates rise, but you've got fixed rate loans. But uh, the funding for that part of the balance sheet is floating rate and therefore you've got a loss in that tenor of your portfolio. Am I making sense?

Speaker A: Uh, no. You've got a loss because you've committed to a fixed interest rate for the next three years and you've committed to receive that on that loan. But actually you should be receiving something higher now because rates have gone up

Speaker B: and you, and you're locked in with the loan.

Speaker A: And you're locked in.

Speaker B: Yeah, and you need to go find the funding at a higher interest rate. By contrast, if we go to, you know, the 6 and 756567, that would be where perhaps you have a floating, your loans are out floating and you, you've found a way to fund it fixed, you've issued a bond or something.

Speaker A: It's actually independent of funding. Even, um, when you, when you've issued the loan, you can even forget about the funding. When you've issued the loan and interest rates have gone up, then all else equal, you should have issued the loan for a higher rate.

Speaker B: Yes.

Speaker A: Dependent of how you fund it.

Speaker B: This is kind of like taking into account all the different instruments the bank has outstanding at any one time.

Speaker A: Yes. Basically in the banking book.

Speaker B: Yeah.

Speaker A: This ignores the trading book.

Speaker B: Yeah. So, uh, um, so, yeah, so sorry. This bank is a, um, a steepening of the yield curve, especially around the four to five year access is extremely good for this bank.

Speaker A: Yes.

Speaker B: If, if, if, if rates between naught and five years drop and between five and 10 years rise, they're doing extraordinarily well.

Speaker A: Yes, exactly.

Speaker B: Yeah. Okay. Thank you for the explanation. And um, so you plot this out as well for bank balance sheets.

Speaker A: Yes. For example, and here we've essentially ignored currencies. So that's the next example. Again, the net DV01 here is zero. And it's a bit comical. Uh, but just to make the point, assets, um, and liabilities are predominantly in different currencies. Here you, you wouldn't do that because you'd run a large FX risk. But, but ignoring that, this is a case of basis risk because even at the different. So the net DV1 is zero. Excuse me. And, and on top of that, even for the individual, uh, tenor points, your net DV1 is also pretty close to zero. But then if you look at it by currency, you'll see that it's not. So for euros, you've got a very positive and large DVO1 between uh, years two and seven and then it flips for eight and nine and it's the, it's the reverse for dollars. So if, let's say dollar rates increase in general, you will have a loss because the negative, um, sensitivity between 2 and 7 is larger than the positive sensitivity between years 8 and 8 and 9. Similarly, if Euro rates go up, then you have, um, an offsetting gain. So if euro rates and dollar rates both go up or both go down, nothing happens. However, if dollar rates go up and euro rates don't move, you've got a loss. If dollar rates go up and euro rates go down, you've got a double loss because you're losing both on, uh, on your dollar positions and you're losing on the euro positions. And if you really want to wreck this balance sheet, then you would say if there is a flattening of the dollar curve. So short term rates up to seven years go up and eight to nine years go down, you're hitting the full sensitivity Profile of the dollar rates. So dollars flatten and then euro rates steepen because then you get a loss on the whole blue top part due to the decrease in rates and you also get a loss on the eight and nine years. Um, that would be the absolute worst case move of, of rates. So the message is essentially it's not enough to look at the total DV1. It's also not enough to just look at the D at each tenant point, but you also have to think about not just currencies, you could also have this within the currency. So if you think about euros you have uribor rates and you have ester, uh rates and if you have different repricings or even the same amount of the same frequency of repricing but different amounts on Uribor index versus Esther if these two rates don't co move then you will have basis risk that's materializing.

Speaker B: Since when have banks in boardrooms been seeing risk analyses like these?

Speaker A: It's a good question. I'm, I'm not sure.

Speaker B: Um, but would this be standard in a boardroom today?

Speaker A: Yes.

Speaker B: Yeah. And um, and obviously it evolves. So what, what you know, people like you are constantly coming up with new ways to see it and new ways to understand it and uh, you're communicating that internally in the bank, uh, you may be communicating it to the regulators. Um, and so banks understanding of what risks they're taking is evolving in itself. We're talking about different kinds of risk, interest rate risk, um, ah, deposit risk. And that helps everybody to understand what we're looking at that may change over time. We may discover that there are risks that we haven't thought of. So we can see it in a more fine tuned way over time and you'll start producing or people like you will start producing those charts basically. And

Speaker A: it is an evolution. Um, and so a lot of these rules only came into force in 2010 also like the supervisory outlier, um, tests and the NII supervisory outlier test only came into force this year um, in Europe. So it does evolve. But I don't know when banks started to look at this and report it to boards, um, independent of regulation.

Speaker B: So I think we have one more slide to go before we get back to the main slide.

Speaker A: So this is not looking at the term structure if you will, but now we're collapsing all of the tenor points but aggregating this by product if you will. And then you can see what's driving the main interest rate risk from an economic value perspective. So the first three buckets that would be your standard lending or standard banking book, if you will. So you have loans, they have a negative, that's the dark blue, the dark blue, uh, bar. And in this example they have a negative DV01 of 25 million. So that means for this bank, if rates go up by one basis point, you lose 25 million in net present value on all of the loans that you've made, regardless of when they mature.

Speaker B: Sorry, what's nmd?

Speaker A: Uh, non maturing deposits, non depreciating deposits.

Speaker B: Thank you. Yeah.

Speaker A: Uh, similarly, if rates went up by one basis point, you would make 15 million economic value, speaking on your liabilities. And then you've got hedges which is offsetting the residual risk. So 8 million here. So this means you've, you've got 2 million negative DVO1. So you're exposed to increases in rates at 2 million um, dollars per basis point on your, on your lending book. Then the next three bars, that would be your treasury operations. So the banking book here is, is just looking at retail customers essentially. And the next bars also look at the debt issuance of the bank. And generally speaking the debt issuance if you have a, uh, bond, and these tend to be in the, in the billions of dollars, if, if you issue new debt at uh, say a billion dollars, then you will generally speaking hedge it immediately one to one. So every bond issuance, um, gets hedged with a corresponding interest rate swap and then you're flat from an interest rate risk. So we've got long term debt excluding additional tier 1. We're showing additional tier 1 bonds separately and then interest rate hedges on these bonds that are exactly offsetting, um, they're not exactly offsetting thereby by 1 million off, but in general they would be. And that's a difference to the hedges, the first gray bar, because those hedges would be macro hedges. So you would look at the entire shape of this structure, for instance, or this, and then you'd say, well actually we think we should get rid of the 5 year interest rate risk here. So then you'd put on interest rate swaps, you would put on receiver swaps to add to DVA one of the five year loans and he could put on payer swaps to get rid of the 2, 3 and 4 year interest rate risk here. And this would be in aggregate across all the different loans, which is different to the micro hedging that you would do for debt issuances. Because, so micro simply means one bond issuance has one dedicated interest rate swap. And macro hedge means you've got 10,000 loans and you're booking one interest rate swap to collectively hedge the interest rate risk of these 10,000 loans. And then the last component is um, net shareholder equity term out. There's lots of different names for that. Some banks call it investment of equity, others call it equity term out. What it essentially means is how do you deal with the equity of the bank? Do you assign it an interest rate risk? And how do you hedge this? So on this GAAP profile in general you do not um, record the equity of the bank. And the assumption is that equity is interest rate risk free. So it's funding for the bank and it doesn't have an interest rate um, attached to it. So essentially the non interest rate bearing liability is funding interest rate bearing assets. And that gives you an interest rate risk mismatch. And you can hedge that. That's the, in a nutshell, the net shareholder equity term. But there was a second, there's a, there's a second slide on that a bit later where we, where we look at that in more detail.

Speaker B: You can hedge it out, but you don't have to, presumably you don't have to, you know, ah, a famous insurance company, Markel, it was, you know. So just give some commentary on this. Um, so what they do is they say uh, so this is insurance company but it's a financial institution. So they say um, policyholder liabilities. So what we can predict will be owed to the policyholders. We will invest that in fixed income securities. So you know, they have a different kind of modeling but they're figuring out what they might owe to uh, policyholders over time. And um, that is uh, so that supports uh, all sorts of fixed income type of instruments. And then the shareholder equity which is there to provide a buffer in the event that they haven't sold the insurance profitably, in the event that the policyholder liabilities are larger than they expected, then the equity capital provides a buffer. But as you look at their balance sheet, they say that they want all of their equity capital invested in um, equities. So on the asset side they invest in long term instruments which don't carry an interest rate which are volatile. And all of those things they say our shareholder value equity can be volatile. It's volatile both because we own assets that are volatile, but also because there's volatility in the liabilities side of the balance sheet. But the point is that the shareholder equity is funding an investment in the stock market. On the asset side the policyholder liabilities are funding. That's pretty simple and straightforward. And uh, and it's something from a shareholder perspective that I can understand and get behind. It's not as great as Berkshire. Berkshire has far in excess of its book value invested in equities. But the idea that you would assign an interest rate risk to equity is kind of weird for me. And uh, and I would, I would want to sort of say that um, if you take that model in a bank, the shareholder equity in the bank is both, you know, it's ensuring the uh, creditors of the bank that if the bank's got it wrong, then, then the shareholder equity will suffer. But I would imagine that it's also right for the shareholder equity to fund some pretty risky assets. If you, if, if you, that makes sense to you.

Speaker A: Yes. And you're not assigning an interest rate risk to the equity as such. But the equity, if we think about a simple balance, uh, sheet, let's say you've got 100 floating rate loans, 80 floating deposits and then 20 equity, then the floating rate deposits and 80 floating rate deposits and 80 loans, they will offset each other. So there's no interest rate risk. But then you've got interest rate free equity funding, 20 floating interest rate uh, loans. So that's going to give rise to an interest rate risk because if rates go up you will earn more, um, and if rates go down you will earn less. And then how you manage.

Speaker B: Yeah. And so that, so maybe the, the right way for me to talk about is that, that, that, that should determine the risk appetite. To the extent that the risk can be absorbed by equity, then that's your risk appetite. So you produce these for different banks and obviously they look different for different banks and different balance sheets.

Speaker A: Uh, yeah. So this is again all of this is for banks that like German banks or Swiss banks in general have more of a fixed rate lending book. Um, it would look different for a Scandinavian bank with um, with a higher proportion of floating rate funding.

Speaker B: What do you call this chart?

Speaker A: It's not really a name for it. I would call this um, DVO1 buy by product category.

Speaker B: And DV01 is a term that people in risk management, they, they all know and understand.

Speaker A: Yes.

Speaker B: Yeah, we're back to one of these,

Speaker A: uh, back to, back to the nutshells. So we've covered quite a lot actually. Now we went through the UBS balance sheet at the very beginning, talked about the different products, we talked about the regulatory framework. Um, so there's no pillar one capital, but there's only pillar two and pillar three. So the um, supervisory Review and evaluation process and the public disclosures the board needs to own Interest rate risk. In the banking book we also talked about the supervisor outlier tests. We went through the different risk types, GAAP basis and option risk and we've gone through the metrics, um, and also discussed um, the different rates at not a very detailed level but some. Now what's left open essentially is some more detailed concepts if you will, like hedge accounting, we briefly touched on it. Um, uh, structural effects is not covered in this um, presentation but it's also an important concept. Um, funds transfer pricing. That's um, the diff. That's when we talked about the treasury function. How do you, what internal rate do you assign from the treasury function to the business areas that take and provide loans? And then there's some strategic decisions or questions like the shareholder equity term out or investment of equity, the non maturing deposit modeling and also stress testing that would also um, I think fall into these concepts.

Speaker B: So what I propose uh, Eric is so we'll put this out as a series and then um, we're going to see what. Then we might come back and do the advanced topics uh, and see where we go with that or we might discuss them offline if there's demand. But I want to close this out with some uh, general questions for you. So we've been through uh, basically in pretty fast order, a course that you've given at the University of Zurich and possibly at other places and you give this course to risk managers at banks, is that right?

Speaker A: Uh, yes, at the University of Zurich it was for risk managers. There were regulators, um, not only bank risk managers, but also from the insurance sector and other sectors. Quite a varied audience in, in risk and finance I'd say.

Speaker B: And did you. Uh, so, so I've gone up a steep learning curve. I've learned many, many things and I think that it behooves people like me and anybody who's interested in finance to understand these things, even if we never invest in a bank because it's what, it's fun and interesting if you like. Um, what was the impact on the course takers? Could you kind of tell that they'd gone through some kind of transformation of some kind, if you like? Um,

Speaker A: it was quite condensed I would say. So we, we went through, we went through the whole deck in, in ah, in one morning lecture, but it was, it was four or five hours. Right. Um, and then we, we had some Q and A's. Um, later on it I, I tried to, to give them as many operational tools as possible and talk about the key concepts and what's important in day to day risk management or what are some of the considerations and questions I stumbled on, um, to give them as much of a practical toolkit as possible.

Speaker B: How does this three hours with me compare or whatever time we spend together? Same idea. I mean I'm like an individual course taker effectively, but if you like.

Speaker A: So I think this, this was very enjoyable because there's actually time to go down certain rabbit holes and um, and as you unpack topics like an onion and you, you peel off layer and layer and layer. Um, whereas if I think there's still about 20 slides to go, um, so condensing all of that into, into four hours, um, necessarily requires you to, to, to brush over um, some topics at a higher level.

Speaker B: Now your knowledge in this area comes from, from where actually, because you did maths at ET Ha, didn't you?

Speaker A: Uh, so one, one book I read was Asset Liability Management by Puia Faravas. I think that's an absolutely outstanding book on uh, on asset liability management and interest rate risk. In the banking book then, um, my managers at Credit Suisse and ubs, I owe a great deal of what I know to them, um, to discussions with them. Um, and then you read risk reports, you try to improve them, you try to. Every time you rewrite something or also developing this course we had um, a risk curriculum at Credit Suisse that I contributed to. And essentially this course also grew out of that um, risk curriculum where more senior risk managers than teach, um, new graduates or junior risk managers. And that was probably the time I learned most because if you're just absorbing the material, I, um, think it's a different level of understanding to when you then have to redo it and explain it to somebody. So that helped me clarify quite a number of concepts or actually take the

Speaker B: data and produce stuff. Um, um, so I have one. I don't know where this one's at right now. Uh, this one's titled uh, this is with um, Hardy, Nunes and Stepanian Finding Blind Spots Before It's Too late. A Reverse Stress Testing Approach for Asset Liability Management. This is a meaty article.

Speaker A: Thank you. Um, yes. Um, it's a model we developed. I also briefly touched on that in the course at University of Zurich.

Speaker B: Um,

Speaker A: in the advanced section of the paper, um, we essentially tried to tackle um, a new regulatory requirement which asks you in stress testing, um, not just to take a scenario and provides an output as to how your bank would fare under that scenario. But it Asks you to do the reverse thing. It asks you to look at the balance sheet and say which scenarios is this balance sheet vulnerable to? And then in normal or forward looking stress testing, you would start with a scenario, apply it to the balance sheet and then get an output. Here you do the reverse, you, the output will be the scenario.

Speaker B: Yeah, so. So, uh, I didn't actually. So, so how. So you take the balance sheet, create a model of the balance sheet and then um, then I guess using computing techniques you can just throw a bunch of stuff at it and see what happens.

Speaker A: Yes, I can give you a 10 minute overview of it if you uh,

Speaker B: um, let's, let's hold that because I think that people will bring this to a nice close. But, but I'd love to talk about it. And we're seeing each other soon. But um, how often do you produce these?

Speaker A: Um, more infrequently now. So this, this project was about a two year project. Uh, and then the intention with publishing it is we, when we started to try and comply with, with that new requirement we went and looked for best practices and there wasn't really much out there. And we said okay, let's go to the drawing board, think about how one could solve this problem, um, and then actually publish the solution that we came up with such that we can start a debate between the industry but also between regulators and academia. And I think there's probably lots of elements of this approach that can be improved. Um, but once it's out there people can read it, they can critique it, um, make suggestions for how to improve it and you get more of a, a discourse between um, the relevant stakeholders.

Speaker B: So I think that this was going to be my final question to you and then we'll close this out and then we'll chat privately. But um, uh, if any. Most of my followers of people died in the world. Value investors, people who worship at the altar of Warren Buffett and Charlie Munger. Go to the Berkshire meeting. Uh, and this has been a kind of a very, from that perspective a deep dive into what for them is a pretty, pretty esoteric area. And you've kind of like in a way you found me, um, from, from the world that you've just described. If you, if we have any of m. The people who normally listen to me, still with me at this point, at the very end of this, um, and they're like okay, that was fun. How does this relate to Warren Buffett and Berkshire Hathaway and what Guy Speer does day to day? And you were asked to provide that bridge. Sort of like to show the meaning of this in the broader context of all of that. Uh, I'd love to hear your best effort. Then maybe I should give my best effort.

Speaker A: I think there is a clear link, um, on the behavioral risk, um, and we talked a bit about it in a previous episode. So fund redemptions and run risk and how, how you manage that from the bank perspective you think about liquidity and interest rate risk. I guess from a fund perspective you would be less concerned about interest rate risk, but you would still be concerned about liquidity risk and about fire sale prices and liquidating into a market of falling prices. And then you can of course impose redemption gates. Uh, but these are all unpleasant measures. Um, so I think there is some liquidity management and behavioral risk management that one needs to do. I think that's a link. Um, then I think there's also an obvious link in terms of if you invest in banks, um, besides credit risk, interest rate risk is a huge, um, and very important risk that these banks take. So understanding what the EVE supervisory outlier test means I, um, think is important. If you think about investors, um, into Silicon Valley bank, um, they probably read up on economic value of equity, um, and interest rate risk. Since because these, these risks were apparent, they were publicly disclosed, it was out in the open. So you need to build the knowledge, um, to understand what, what this really means. And then I guess take a view, um, on the view the bank takes, if the bank wants to run a lot of interest rate risk, um, the investor will then take a view and say, okay, given the macroeconomic environment we're in, do I actually think they take too much interest rate risk and do I want to divest or do I want to invest more? These types of questions.

Speaker B: Yeah. And uh, so I'll close it out from my perspective. Uh, I think that actually if I look back on the four hours we've spent together, so I think that um, for me, for your interest and for the listener's interest, when I discovered T accounts, which was maybe in my second year of, first year of studying economics, it was a revelation to me. I mean and anybody. This is like basic accounting, but um, T accounts and the realization that you can describe.

Speaker A: Pardon, what's that?

Speaker B: T accounts is basically you do you draw T. You put an A on the one side as assets and L on liability on the other. And then you can trace through any business, anything you can trace through with what happens on the assets and the liabilities. And you change the numbers with, with double entry Bookkeeping, and you get a picture that emerges and it's beautiful and it's fun to see. But, but the, the learning curve that I've been, or the learning bump actually that I've been up through, the time that we've spent together is to realize actually that, that uh, t accounts a balance sheet, if you like, is one dimensional. And you live in a world where a balance sheet goes out in time 50 years and uh, at each tenor of that. So I don't know. I mean you, you had it as a chart going along left to right, but I imagine it as me going through time. You know, I have a personal balance sheet that goes out through time and it kind of like goes out in front of me. And uh, and you know, I, I can look forward to um, you know, saving money right now, but, um, drawing down on those savings when I'm in retirement. I can go look forward to going through a period when my children go through college while I have excess expenses in that regard. And so, uh, both in terms of annual income and expenditure and in terms of assets and liabilities, that idea that we actually have to think of, um, balance sheets through time and then at the same, we can't just bring it all forward to today, or we can, but that, that, you know, we need to know that we've done that and then, and then to realize that uh, different scenarios, different ways in which the future plays out can impact different parts of that, uh, sort of like balance sheet through time in different ways, uh, is kind of like a huge insight actually. And something that I realized that I have no doubt that Warren Buffett is thinking in terms of Berkshire, thinking about Berkshire Hathaway in terms of that you have to, if you run any financial institution and actually, I don't know, you know, yes, we have an Aquamarine Fund, we have shareholders, but in a way they're shareholders who can demand their money, uh, according to rules when they want to demand their money. So there's a, there's a duration to those shareholder funds and I need to think about that in terms of the, uh, assets in the fund. And, and so it's true for individuals and this has been enormously, uh, for the, the listeners interest. When I meet people who are interesting, I often choose to do a podcast with them because I could have never forced or would have been unfair to force Eric to sit and do this one on one with me, uh, just for me. But because you all have been listening in now, if somebody, if somebody's just loving us still at this point, you know, they haven't decided to just Geeky. Yeah. And they want to find you and, uh, do stuff with you. What's the best way to find you?

Speaker A: The best way is LinkedIn. Um, and then there's also. I'll put these slides up, including the, um, uh, the SQL and. And we'll see whether we'll get to it, um, on. On either a Google site, um, Web page. So if you Google my name, it. It'll pop up and, um, the slides will be there.

Speaker B: So. And just briefly, where. Where just you. Maybe you're allowed to say where you're sitting. It's a nice, fun background.

Speaker A: I'm sitting. Sitting in. In Copenhagen at Nodea. It's. It's the trading floor.

Speaker B: Um, there you go.

Speaker A: On the ground below.

Speaker B: And I'm sitting in my office in Zurich. So thank you, everyone, for listening in. Uh. Oh, there we go. Look at that. It's been an enormous pleasure and a privilege and, um, catch you all on the flip side.

Speaker A: Thank you so much for having me, Guy.