Yes, we all know cyber security is the top risk facing banks and companies across all industries. However, as financial industry leaders scramble to address cyber risk and security, other banking risk could easily fall under the radar. When assessing business risk in the coming quarter and heading into 2019, keep these sneaky culprits in mind:
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
As interest rates continue to move up, no blanket predictions can be made about the near- or long-term behavior of non-maturity deposits at financial institutions nationwide. Moreover, deposit behavior will vary significantly among product types and institutions, depending on a bank or credit union’s customer base and product mix.
When it comes to deposit behavior when interest rates are rising, there is no crystal ball. The impact of rising rates is wrought with uncertainty. Conventional wisdom suggests that if interest rates rise, there will be a drop – or slowdown — in deposit growth. The basis of this logic is that as market rates rise, financial institutions won’t increase deposit rates as much — that is, their deposit betas are less than 1 – and that will lead to fewer deposits. While there is truth to this view, there are other nuances and factors to consider, specifically relating to risk.