It is easy to generalize what rising interest rates mean to a financial institution’s risk management plan, but the current rising rate environment is somewhat different and has a few unique features that may alter risk management decisions for banks and credit unions.
Changes in driver rate relationships are key influences determining the Interest Rate Risk (IRR) position of most institutions. Today, it is commonplace for financial institutions to incorporate testing for basis risk and yield curve shape risk in their IRR analyses. Three elements are needed for a successful basis risk and yield curve risk analysis solution: Asset Liability Management (ALM) model setup and fine tuning; defining the appropriate rate tests; and effectively communicating the institution’s Net Interest Income (NII) IRR position
The 6 Tenets of Effective Model Risk Management
As financial institutions progress in the new economic cycle — a cycle defined by gradual interest rate increases, regulatory uncertainty and economic growth — it may be time to revisit the financial models and model processes used to facilitate interest rate risk (IRR) analyses and other risk analyses such as capital stress testing. The accuracy and effectiveness of a model is critical because its outputs may alter the accuracy and effectiveness of related models and impact strategic decisions.