3 Reasons to Revisit Your IRR Policy Limits

Do you have appropriate policy limits for all key interest rate risk measurements? How did you set your set them, and do they really still make sense for your institution?

When market rates weren’t changing, most institutions were in general compliance with policy limits. However, with the steady ramp up of rates through mid-2019, and then the massive drop in March of 2020, we’ve seen numerous financial institutions fall out of policy compliance. We’ve also heard from many of our clients that just aren’t sure what they should use for limits for the various non-parallel rate shock scenarios and now emphasized net income shock measurements. The old industry standard limits that so many institutions are still using just don’t seem to be working anymore.
So, why should you take the time to revisit your IRR policy limits?

1. Examiners will be looking.
   While they routinely review policy limits and compliance, we expect them to look even closer now that rates have dropped so much. We’ve also seen examiners asking our clients how they originally determined their limits and if they have plans to change them.
   
   
2. Dramatic fluctuations in market rates have caused material changes in model results.
   We’ve seen many of our clients experience significant changes in both their NIM shocks and EVE ratios, and sometimes it can be difficult to truly understand why those changes have occurred. Moreover, many model users just aren’t sure if the changes are permanent or if the results are likely to revert back to the more recent historical levels if market rates go back up.
   
   
3. Many institutions find themselves having regular policy exceptions.
   This leaves you in the position of having to decide what to do about it. Should you change the limits, just continue to approve the exceptions, or actually restructure your balances sheet? And if you decide to change the limits, what should you change them to?

Click here to learn about our 45-minute premium training where we discuss the key IRR measurements and provide guidance on how to set limits for each one that are appropriate for your institution. We’ll also go through a “cheat sheet” detailing suggestions for each measurement and give you the confidence that you can defend the limits you establish.

About the Author:
Dave Wicklund, Director of ALM Advisory Services 

Dave Wicklund is a Former Senior Bank Examiner and Capital Markets Expert for the FDIC. He is also a director and ALCO chairman for a bank group that employs a complex Liquidity management system and uses material levels of non-traditional funding sources.