Why Use Us for Interest Rate Risk
Interest Rate Risk is a component rating in a Regulatory Risk Examination. IRR must be managed on an ongoing basis, as IRR can pose a grave threat to an institution if not managed properly. We have built IRR programs from scratch; successfully remediated Enforcement Actions which included IRR, and have helped institutions to adjust their loan and deposit portfolios to reduce and properly manage IRR.
Interest Rate Risk The Nature of Interest Rate Risk
Interest Rate Risk (IRR) is the risk associated with paying too much for deposits and not having a sufficient return on loans, so that the spread - the difference between aggregate yield of the loan portfolio and the aggregate cost of deposits, is too small, or even negative. IRR is compounded if low interest rates on loans are locked in for many years - for example, low rates on 30 year fixed residential mortgages.
An institution can encounter too much IRR by having a low or negative spread, but also by having a loan portfolio that is skewed towards one type of loan product with a high average amount of time to maturity. In such a case, the institution is slowly losing money over time, or has a narrow spread over time, preventing sufficient growth and expansion.
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Consider our services to help manage your institution's Interest Rate Risk and reduce IRR as much as possible. Reach out today for a free consultation !
Interest Rate Risk Management and Testing
IRR must be tested and measured and reported on, generally on a quarterly basis. IRR is tested by three methods:
- measuring Rate Sensitive Assets (RSA) against Rate Sensitive Liabilities (RSL) in order to measure maturity mismatches;
- stress testing the loan portfolio with scenarios of interest rate changes and measuring the resulting changes to interest income;
- stress testing the loan portfolio with scenarios of interest rate changes and measuring the resulting changes to the institution's equity.
Reporting should be made to the Asset Liability Committee and the Board, and adjustments should be made to the loan and deposit portfolios over time, based on the results of IRR testing.