Plansmith Blog

4 Reports for Analyzing & Understanding IRR

Posted by Dave Wicklund on 11/18/19 1:48 PM

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?

3. Value-at-Risk

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?

If you have any questions about these reports or IRR in general, email me or click to schedule a discovery call.



Topics: interest rate risk, community bank interest rate risk, interest rate risk management, bank irr reporting

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