Interest Rate Risk Guidance

by Lisa Hochgraf

Early this year, the Federal Financial Institutions Examination Council released guidance in the form of 12 frequently asked questions regarding the 2010 Interagency Advisory on Interest Rate Management.

“The FAQs are an interesting regulatory advance,” Bill McGuire, Ph.D., president/CEO of McGuire Performance Solutions, told attendees of a company webinar. “This rather proactive approach is coming from current setting for IRR analysis.

“We’re in kind of an unusual world in that rising rates are the only thing that has any relevance in terms of exposing or creating opportunity for credit unions,” he continued. “In some sense it makes it easier; there’s really only one way rates can go. At the same time, we’re in a situation where different might be the new normal.

“If interest rates rise,” he asked, “will core deposit pricing take off the way it has historically? Will it lag significantly? Will we see an increase in loan prepayments?”

Because only rising rates really matter, asset/liability managers have an even tougher job than usual, McGuire asserted.

“We have more difficultly getting our hands around what’s happening on the balance sheet,” he explained. “At the same time the board expectations are for current margin and they want to know exactly what will happen when rates rise.” He suggested that there was real “resume risk” for asset/liability managers if the model is pointing the wrong direction.

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