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.