As you may have seen, in February we did a webinar on recent changes in the way Regulators are evaluating funding risk and the new measurements they are using to assign the “L”-Liquidity rating. As we noted, their focus has been on brokered deposits, “potentially volatile funding sources,” and “high rate deposits.” We pointed out numerous weaknesses in the way these funding sources are being assessed and limited.
As you grow, your organization has more and more things to manage.
- Strategically, you’re working to find the right markets to penetrate with the ideal products and services.
- Financially, you’re making sure your earnings are meeting or exceeding targets.
- And organizationally, you’re looking for the right talent to expand and grow.
One thing you can’t ignore is the role Interest Rate Risk plays in the banking industry today.
Regulatory compliance costs are skyrocketing!
The focus of safety and soundness examinations continues to move towards asset/liability management and ensuring financial institutions are complying with the guidance issued in the last several years.
So why do we keep hearing about “surge” deposits and how important it is to know if you’re holding any? Well, it might be because in the past 10 years, CD balances in FDIC insured institutions have fallen by $880 Billion; yes, that’s Billion with a capital “B.” And while that may be the bad news, the good news is that over the same time period, non-maturity deposits (DDAs, NOWs, Savings, and MMDAs) have grown by $5.9 Trillion (with a capital “T”).
Knowing and understanding your bank'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.
In the last 5-10 years, there's been a lot of growth in DDA, NOW, MMDA, and savings accounts. These deposits can provide a great low-cost funding base, but they can also draw attention at your next exam.
Examiners are looking closely at these surge deposit balances. Specifically, they're looking to see if you've considered surge deposits in 3 ways.
Backtesting can be a painful topic for bankers. In this post, I'll answer the top 5 most common questions I hear about backtesting. I'll reference my first post, Independent Review, Model Validation, and Backtesting: Same Thing, Only Different, so you might want to revisit it before reading on. In that blog, we looked at the interrelationship of these three items and brought up a few questions on backtesting.
Specifically, we questioned 5 things: who should do it, how often should it be done, what period should be covered, do you need to backtest model results and assumptions, and why even bother if market rates really aren’t changing.
It's tough out there for banks. With so much competition from other financial institutions and new technologies, not to mention increased government regulation, it's no wonder some bankers feel overwhelmed. One of the hot topics of regulation at the moment is interest rate risk, and examiners want to know how the bank is poised to handle it. What does this come down to? It comes down to a process for handling interest rate risk, or an Interest Rate Risk Management Program.
“Where is someone that will pay me 1.5X book?; that’s what my Interest Rate Risk model says my bank is worth.” That statement, along with “there is no way this bank could be sold for 1.5X book”, are two comments I’ve heard a few too many times lately from bankers and examiners. While I will let you figure out which group is responsible for each statement, both illustrate a somewhat common misconception that capital values (sometimes called “market value of equity”) from interest rate risk models are meant to reflect actual current and projected institution sales prices.
So if you’re reading this, my second ever blog post, you’ve probably already seen the first one entitled "Independent Review, Model Validation, and Backtesting: Same Thing, Only Different." In that piece, we looked at the interrelationship of these three items and brought up a few questions on backtesting. Specifically, we questioned who should do it, how often should it be done, what period should be covered, do you need to backtest model results and assumptions, and why even bother if market rates really aren’t changing.