A new IRRBB Roadmap for Knab

After a prolonged period of stable low (and at points even negative) interest rates, 2022 saw the return of rising rates, prompting Dutch digital bank, Knab, to appoint Zanders to reevaluate and reinforce the bank’s approach to risk.

The evolution of Knab

Founded in 2012 as the first fully digital bank in The Netherlands, Knab offers a suite of online banking products and services to support entrepreneurs both in their business and private needs.

“It's an underserved client group,” says Tom van Zalen, Knab’s Chief Risk Officer. “It's a nice niche as there is a strong need for a bank that really is there for these customers. We want to offer products and services that are really tailored to the specific needs of those entrepreneurs that often don’t fit the standard profile used in the market.”

Over time, the bank’s portfolio has evolved to offer a broad suite of online banking and financial services, including business accounts, mortgages, accounting tools, pensions and insurance. However, it was Knab’s mortgage portfolio that led them to be exposed to heightened interest rate risk. Mortgages with relatively long maturities command a large proportion of Knab’s balance sheet. When interest rates started to rise in 2022, increasing uncertainty in prepayments posed a significant risk to the bank. This emphasized the importance of upgrading their risk models to allow them to quantify the impact of changes in interest rates more accurately.

“With mortgages running for 20 plus years, that brings a certain interest rate risk,” says Tom. “That risk was quite well in control, until in 2022 interest rates started to change a lot. It became clear the risk models we were using needed to evolve and improve to align with the big changes we were observing in the interest rate environment—this was a very big thing we had to solve.”

In addition, in the background at around this time, major changes were happening in the ownership of the bank. This ultimately led to the sale of Knab (as part of Aegon NL) to a.s.r. in October 2022 and then to Bawag in February 2024. Although these transactions were not linked to the project we’re discussing here, they are relevant context as they represent the scale of change the bank was managing throughout this period, which added extra layers of complexity (and urgency) to the project.

A team effort

In 2022, Zanders was appointed by Knab to develop an Interest Rate Risk in the Banking Book (IRRBB) Roadmap that would enable them to navigate the changes in the interest rate environment, ensure regulatory compliance across their product portfolio and generally provide them with more control and clarity over their ALM position.  As a first stage of the project, Zanders worked closely with the Knab team to enhance the measurement of interest rate risk. The next stage of the project was then to develop and implement a new IRRBB strategy to manage and hedge interest rate risk more comprehensively and proactively by optimizing value risk, earnings risk and P&L. 

“The whole model landscape had to be redeveloped and that was a cumbersome and extensive process,” says Tom. “Redevelopment and validation took us seven to eight months. If you compare this to other banks, that sort of execution power is really impressive.”

The swiftness of the execution is the result of the high priority awarded to the project by the bank combined with the expertise of the Zanders team.

Zanders brings a very special combination of experts. Not only are they able to challenge the content and make sure we make the right choices, but they also bring in a market practice view. This combination was critical to the success of the execution of this project.

Tom van Zalen, Knab’s Chief Risk Officer.

Clarity and control

Armed with the new IRRBB infrastructure developed together with Zanders, the bank can now measure and monitor the interest rate risks in their product portfolio (and the impact on their balance sheet) more efficiently and with increased accuracy. This has empowered Knab with more control and clarity on their exposure to interest rate risk, enabling them to put the right measures in place to mitigate and manage risk effectively and compliantly.

“The model upgrade has helped us to reliably measure, monitor and quantify the risks in the balance sheet,” says Tom. “With these new models, the risk that we measure is now a real reflection of the actual risk. This has helped us also to rethink our approach on managing risk.”

The success of the project was qualified by an on-site inspection by the Dutch regulator, De Nederlandsche Bank (DNB), in April 2024. With Zanders supporting them, the Knab team successfully complied with regulatory requirements, and they were also complimented on the quality of their risk organization and management by the on-site inspection team.

Lasting impact

The success of the IRRBB Roadmap and the DNB inspection have really emphasized the extent of changes the project has driven across the bank’s processes. This was more than modelling risk, it was about embedding a more calculated and considered approach to risk management into the workings of the bank.

“It was not just a consultant flying in, doing their work and leaving again, it was really improving the bank,” says Tom. “If we look at where we are now, I really can say that we are in control of the risk, in the sense that we know where it is, we can measure it, we know what we need to do to manage it. And that is, a very nice position to be in.”

For more information on how Zanders can help you enhance your approach to interest rate risk, contact Erik Vijlbrief.