An Introduction to Banking, 2nd Edition

Chapter 12¹NET INTEREST INCOME (NII), NET INTEREST MARGIN (NIM) AND THE MANAGEMENT OF INTEREST‐RATE RISK IN THE BANKING BOOK

For conventional commercial banks, net interest income (NII) is their core form of revenue. For this reason, it is important for asset–liability committee (ALCO) to understand its drivers and behaviour, so that it is able to manage it and plan forward for its performance. NII itself is exposed to movements in interest rates, so this makes managing interest‐rate risk in the banking book (IRRBB) important as well. This chapter considers behaviour and characteristics of NII and net interest margin (NIM), before moving on to key principles of IRRBB management.

NET INTEREST INCOME

Net Interest Income or NII is defined as the interest income received from lending activities or debt instruments held (for example, subordinated debt, senior debt, or certificates of deposit issued by other financial institutions) less the interest expense incurred on deposits or issued debt instruments. It is expressed as a currency amount over a period of time, normally 3, 6, or 12 months in line with reporting frequencies.

Examples of banking products that would typically contribute to NII include: loans, mortgages, overdrafts, credit cards, asset finance, instant access deposits, savings accounts, and fixed‐ or variable‐rate bonds. Income earned from activities such as asset management, broking, insurance, corporate finance, investment management, and trusts and estate planning ...