Interest-rate risk in the banking book

IRRBBA: Risk management objective and policies

a. Definition of interest-rate risk in the banking book (IRRBB) for the purpose of risk management and measurement

Changes in interest rates impact the economic value of assets, liabilities and off-balance-sheet items (present-value perspective) and affect income from interest operations (earnings perspective).

Interest-rate risks may arise due to temporal mismatches in the fixed-interest period or the interest rate renewal of assets, liabilities and off-balance-sheet items (interest rate renewal risk) or from changes in the balance sheet structure as well as changes in the interest rates for instruments that have a similar maturities but are valued based on different interest rates (basis risk).

b. Strategies to control and mitigate IRRBB

Due to LUKB's strong positioning in the interest margin business, interest rate risk represents a significant risk for the bank. Control of interest-rate risk is thus one of LUKB’s core activities and is managed by the Asset & Liability Committee (ALCO), consisting of department heads, at the request of the ALCO preparatory committee. As part of the monitoring activities performed by the Finance department, the interest-rate risk metrics and the draw-down of the defined limits are determined at least monthly and reviewed by the independent Risk Control function. Callable or on-demand positions are incorporated in the individual metrics using a replication model that is reviewed annually. In addition, a dynamic analysis of the income effect is carried out quarterly based on various scenarios. The results of regular stress tests round off the decision-making basis for managing interest-rate risk. Derivative financial instruments are also used as part of asset & liability management (ALM) to manage and hedge interest-rate risks. The tactical implementation of the requirements is carried out under the leadership of the CFO in collaboration with Trading & Treasury Services.

c. Periodicity of calculation and description of IRRBB metrics

The interest-rate risk metrics (sensitivity of equity to changes in market interest rates, modified duration of assets and liabilities, interest-rate gaps and value-at-risk analyses as well as utilisation of the corresponding limits) are determined at least monthly, whereby the sensitivity of equity and the value-at-risk (VaR) of the banking book are calculated and monitored weekly. In addition, a dynamic analysis of the income effect is carried out quarterly based on various scenarios.

d. Interest-rate-shock and stress scenarios

Taking into account sudden changes in interest rates, the Finance department calculates the impact of eight internal interest-rate scenarios on the present value of the banking book and reports the results to the ALCO and the ALCO preparatory committee. In addition, the six standard interest-rate-shock scenarios are calculated and reported in accordance with FINMA Circular 19/02 ‘Interest rate risks – banks’.

The negative impact on LUKB of sudden changes in interest rates may not exceed 16 % of the present value of equity. If this limit value is exceeded, the Finance department informs ALCO and the ALCO preparatory committee without delay.

e. Deviating model assumptions

The model assumptions used in the bank’s internal interest-rate-risk measurement system do not differ materially from the information provided in Table IRRBB1 for the economic value of equity (EVE).

f. Hedging the IRRBB

Interest-rate risks in the banking book are hedged by means of balance sheet measures (in particular financial assets, bonds and mortgage-backed loans) or derivative financial instruments via Trading & Treasury Services. Derivative financial instruments are used to manage the impact of future interest rate changes. Interest-rate risks of interest-rate-sensitive exposures in the banking book are generally hedged by interest-rate swaps and interest-rate futures.

The hedging relationship as well as the objectives and strategy for hedging instruments are documented when the transaction is concluded, while the effectiveness of the hedging is periodically reviewed. For this purpose, assets and liabilities are considered separately. Hedging is classified as ‘effective’ if the present value of the derivative financial instruments changes in the opposite direction to that of the hedged group of transactions. Hedging transactions that are ineffective or only partially effective are treated as trading transactions to the extent of the ineffective portion.

g. Key modelling and parameter assumptions

  1. Change in economic value of equity (ΔEVE) – cash flows
    The cash flows are presented inclusive of margin.
  2. Change in economic value of equity (ΔEVE) – mapping procedure
    The cash flows are calculated on an individual contract basis.
  3. Change in economic value of equity (ΔEVE) – discount rates
    The cash flows inclusive of margin are discounted primarily using the Saron and swap curves.
  4. Changes in net interest income (ΔNII)
    The income effect is calculated dynamically based on at least two different interest-rate scenarios. The underlying observation period of the simulation is three years. Based on the interest-rate scenarios, interest-rate developments are taken into account for all products, whereby the defined replicating strategies are applied to non-maturing products. The budgeted growth is simulated under assets and liabilities.
  5. Variable positions
    Callable positions or on-demand positions (non-maturing products) are incorporated in the individual metrics using a replication model that is reviewed annually.
  6. Positions with redemption options
    LUKB's products generally do not contain behaviour-dependent redemption options.
  7. Fixed-term deposits
    LUKB's products generally do not contain behaviour-dependent redemption options. If forward transactions are terminated early, this is done at market value.
  8. Automatic interest-rate options
    LUKB's products generally do not contain automatic prepayment options.
  9. Derivative positions
    Interest-rate derivatives are used to manage interest-rate risk. LUKB does not currently use non-linear interest-rate derivatives. The interest-rate risks of interest-rate-sensitive exposures in the banking book are usually hedged by interest-rate swaps and interest-rate futures.
  10. Other assumptions
    No other assumptions.

IRRBBA1: Quantitative information on exposure structure and repricing

Volume

Average interest rate reset period (in years)

Maximum interest rate reset period for expo- sures with modeled (not determined) inter- est rate reset dates (in years)

Amounts in millions Swiss francs

Total

of which CHF

of which in other significant currencies

Total

of which CHF

Total

of which CHF

Defined interest rate reset date

Amounts due from banks

183.1

120.0

–

0.68

0.93

–

–

Amounts due from clients

4,758.0

4,203.5

–

1.31

1.40

–

–

Money market mortgage loans

11,134.5

11,134.5

–

0.03

0.03

–

–

Fixed-rate mortgage loans

28,222.1

28,165.0

–

3.29

3.30

–

–

Financial investments

5,290.1

4,792.2

–

5.51

5.61

–

–

Other receivables

3.8

0.3

–

0.51

0.55

–

–

Receivables from interest-rate derivatives1)

11,664.3

11,655.0

–

3.24

3.24

–

–

Amounts due to banks

– 7,255.3

– 5,354.3

–

0.17

0.16

–

–

Amounts due in respect of customer deposits

– 5,387.0

– 4,412.0

–

0.48

0.56

–

–

Medium-term notes

– 206.2

– 206.2

–

1.76

1.76

–

–

Bonds and mortgage-backed bonds

– 18,053.0

– 17,867.9

–

7.22

7.26

–

–

Other payables

– 27.1

– 24.6

–

0.53

0.56

–

–

Payables to interest-rate derivatives1)

– 11,664.3

– 11,655.0

–

1.53

1.53

–

–

Undefined interest rate reset date

Amounts due from banks

347.3

47.2

–

0.00

0.00

–

–

Amounts due from clients

676.8

644.9

–

1.09

1.10

–

–

Mortgage loans with floating rates

1,561.1

1,561.1

–

1.49

1.49

–

–

Other receivables on demand

-

-

–

-

-

–

–

Payables on demand from personal accounts and current accounts

– 15,569.8

– 14,569.2

–

1.87

1.87

–

–

Other payables on demand

– 519.7

– 334.6

–

0.00

0.00

–

–

Payables arising from client deposits, terminable but not transferable (savings)

– 9,851.3

– 9,766.7

–

1.80

1.81

–

–

Total

– 4,692.5

– 1,866.9

–

2.79

2.87

10.00

10.00

1)Dual disclosure of derivative volumes under both receivables and liabilities for technical reasons

IRRBB1: Quantitative information on IRRBB

∆EVE1) (change in the economic value of equity)

∆NII (change in net interest income)

Amounts in millions Swiss francs

31.12.2025

31.12.2024

31.12.2025

31.12.2024

Parallel up

120.5

308.9

56.8

73.0

Parallel down

– 285.4

– 528.7

– 38.0

– 80.4

Steepener2)

247.9

342.5

–

–

Flattener3)

– 241.5

– 303.3

–

–

Short rate up

– 123.9

– 103.2

–

–

Short rate down

130.7

108.5

–

–

Maximum4)

– 285.4

– 528.7

– 38.0

– 80.4

Amounts in millions Swiss francs

31.12.2025

31.12.2024

Tier 1 capital

4,983.7

4,665.0

1)Due to the structure of LUKB's balance sheet, a parallel downward shift (previous year: parallel downward shift) leads to the largest negative change in the present value.

2)Decrease in short-term interest rates combined with increase in long-term interest rates

3)Increase in short-term interest rates combined with decrease in long-term interest rates

4)Largest negative change