Over the last few years, the financial industry have questioned how much interest rates will rise and to what degree institutions are prepared. Compounding this uncertainty, community banks and credit unions have tried to cope with additional pressure to ensure sustainable profitability by tightening margins and cutting back costs. In response to these pressures, institution leaders have added to their balance sheet assets with longer maturities and more options. These products serve to diversify the balance sheet and widen margins, but in doing so may increase interest rate risk (IRR).
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.
Despite predictions and announcements to the contrary, the Federal Reserve Board (Fed) might not raise interest rates at all this year.
That’s according to Richard Sheehan, Ph.D. and Senior Vice President, Analytics at MountainView Financial Solutions, a Situs company. He points to past years when the Fed consistently over-predicted the number of rate hikes it would carry out.
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.