When it comes to Interest Rate Risk (IRR) management, one thing is certain: Interest rates may rise of fall, altering how financial institutions approach the process. While some expect rising rates, and others expect a plateau, financial institutions should have a framework in place that can stand firm in any condition.
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 rise, financial institutions are revisiting whether an in-house asset liability management (ALM) model or a third-party (outsourced) ALM model is the best option for monitoring and assessing interest rate risk (IRR). Many variables and factors need to be considered when making such a critical decision. The following four factors will help institutions identify when it is best to implement an in-house model and when to outsource to a third-party vendor to ensure compliance with regulatory mandates associated with measuring and monitoring interest rate risk: