Knowing and understanding your organization's risk position is important. Regulators expect you to keep a close eye on your IRR exposure and be ready for a rising rate environment.
Here are four reports to help you measure and monitor your interest rate risk.
4 Reports for Analyzing & Understanding IRR
1. Margin Risk Tolerance
How much rate change can your organization absorb?
- Start with your 12-month NIM projection
- Add non-interest income
- Deduct capital requirements and non-interest expense
- How much can rates change before your cushion goes to zero?
2. Rate Shocked Margin
Will you survive low probability, high impact events?
- Review your 12- and 24-month horizon of earnings
- Run shocks out to +/-400 bps in 100 bp increments
- What if rates don't move in a parallel fashion?
- Run multiple likely and unlikely non-parallel shifts
- Will earnings fall below your minimum required margin?
- If so, will capital be jeopardized?
MVE, EVE, NEV and MVPE - Whatever you call it, "V" is for value!
- Bank-specific assumptions are essential:
- Prepayment and decay rates have the biggest impact on results
- Focus on how the capital value changes in the shocked scenarios
- Value shouldn't fall below board policy limits
4. Sensitivity Test
Do the analysis again using likely and unlikely assumptions...
- Change decay rates to the extreme:
- Are you still within board limits?
- Change one assumption at a time to identify the greatest vulnerability
- Run multiple scenarios using low probability assumptions:
- What's the worst case scenario?