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.
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.
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?
Does your organization have the IRR and Liquidity knowledge it needs to succeed?
Regulatory guidance emphasizes the importance of effective corporate governance and outlines expectations for both board members and senior management personnel. Specifically, interagency guidance identifies the board of directors as having the ultimate responsibility for the risks undertaken by an institution – including IRR and liquidity.
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.
Another great year has gone by, the stock market notwithstanding. With the number of banks and credit unions continuing to shrink, the cream is rising to the top. The quality of the remaining institutions is getting better.
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”).
The October 2017 issue of ICBA Independent Banker features Dave Wicklund and his views on selecting a service provider for outsourcing your IRR analysis. You can find the article on page 57.
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.