Establishing and maintaining a sound interest rate risk (IRR) program is crucial to ensure proper balance sheet structure and comply with Regulatory expectations. During my 20+ years as a senior FDIC examiner, I routinely saw organizations experiencing issues with their ALM/IRR practices, ranging from loose misunderstandings of the guidance to critical errors that put the health of the organization at risk. Unfortunately, in my current advisory role, I see the same issues all too often.
It seems like just yesterday (okay, it was a year ago) that I had just written a blog declaring the end to, or “the death of,” Surge Deposits. In that post, I had noted how at the time of, and following the 2007-2009 Great Recession, the banking industry saw a substantial influx of deposits as real estate and equity investors liquidated positions and sought safe places to store their money and ride out the storm. I further noted that as CD rates plummeted during, and following the economic crisis, CD holders weren’t being provided with any incentive to have their money “locked” into time deposits. As time deposits matured, CD holders routinely moved their balances into more liquid non-maturity deposits (NMDs). These former CD holders were essentially temporarily “parking” their money in NMD accounts, just waiting for CD rates to return to what they believed were more “normal” levels, at which time they’d move the balances back into time deposits.
Given the current low-rate environment, I’ve again been getting some questions on “negative rates” and the impact they would have on financial institutions, and more specifically interest rate risk modeling. We’ve all heard about negative rates in Japan and parts of Europe, so it would seem reasonable to wonder about the impact that negative rates could have here in the U.S.
Given the historic low U.S Treasury rate environment and the recent 150 basis point near-immediate drop in rates, we’re expecting an increased regulatory focus on interest rate risk (IRR) and liquidity management.
It’s no doubt that financial institutions will see pressure to not only reforecast their 2020 budgets, but also to run future IRR shocks and more custom “what-if” scenarios as part of their regular IRR modeling program. Liquidity management and stressed-scenario cash flow modeling are also more important now than ever.
For the past ten years or so, surge deposits have been a material issue in asset/liability management. At the time of, and following the 2007-2009 Great Recession, the banking industry saw a substantial influx of deposits as real estate and equity investors liquidated positions and sought safe places to store their money and ride out the storm. The impact of this flight to safety was compounded by Government sponsored initiatives such as the Transaction Account Guarantee (TAG) Program and increases in Federal deposit insurance levels.
As a result, banks experienced significant deposit growth, and while these surge deposits would have normally been seen as a good thing, the near evaporation of loan demand left many banks with far more deposit dollars than they could effectively put to use. In turn, market liquidity levels skyrocketed, but margins were compressed. For the purpose of this article, we’ll refer to these funds moving from real estate, equities, or any other investments into the banking system as Type I Surge Deposits.
I know my numbers, but how do I communicate them to others within my organization?It’s a valid question that Plansmith fields regularly from our clients. We’ve got some answers for you.
Everyone relates to numbers, no matter who you're talking too, but not everyone reads them in the same way. So how do you make the most out of your conversations with everyone who needs to relate to the same numbers?
As we move into a new year, you may still be working on a few of those items you didn’t quite get to in 2019. And for a lot of our clients, one of those items is often backtesting. Given all the confusion surrounding backtesting, it can be pretty easy to keep pushing it to the bottom of the “to-do” list.
So, we thought it might be a good idea to dust off a blog I wrote back in 2015 to jump start your 2020 so you can get one more thing crossed off your list. In that blog, we looked at a few of the most common questions we get on backtesting. Specifically, we discussed who should do it; how often it should be done; what period should be covered; and if you need to backtest just model results, or also key model assumptions.
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.
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.