Original articles

Our own observations & insights related to the banking industry.

How long did it take for rates to rise that much? What was the rate at the end of that period?

...read more... | Originally published 10/04/2018

Most community banks regularly measure and monitor IRR. Depending on the rate cycle certain modeling practices and assumptions receive more scrutiny than others. Typically when market rates change - bank risk profiles change, sometimes dramatically, so it's important that we...
...read more... | Originally published 3/25/2014

There’s a book called Interest Rate Risk Management that I’ve mentioned on this blog before. In it the author dedicates an entire chapter to “Income Simulation.” Essentially it’s an in-depth look at measuring IRR exposure using a future projection and then stress-testing or changing rates: i.e. earnings-at-risk... ...read more... | Originally published 9/11/2012

If there is one thing that’s absolutely standard in any interest rate risk report package it’s the +/-200bp shock. It has been since the mid-1990’s since the regulators suggested it in their 1996 Joint Policy Statement on IRR. ...read more... | Originally published 2/28/2012

Last week the FFIEC released this FAQ for the 2010 Interagency Advisory on IRR. It’s a decent document that covers some important questions that I know clients and potential clients have had. However, it’s by no means a comprehensive document. ...read more... | Originally published 1/17/2012

After reviewing IRR shock-test results for a few quarters it usually doesn’t take a person very long to start questioning the “reality” of the shock-test. The common observation is usually, “all rates never move up or down in parallel…that’s not very realistic!”
...read more... | Originally published 12/22/2011

Several key IRR modeling practices were thrust into the spotlight by the most recent IRR advisory. Many of the more popular practices have made their way to the examiner’s checklist, including the concept of a static versus dynamic forecast. Here’s an excerpt from the advisory... ...read more... | Originally published 9/13/2011

Imagine it’s August 2009 and you’re approaching budgeting season. You are starting to prepare your projections for management and for use in your stress-testing. You’ve heard that the “best practice” is to prepare a two-year forecast. You ask yourself, “what could happen in the next two years that could have an impact on our performance?” ...read more... | Originally published 8/19/2011

I received a few emails telling me that content was just a little too basic...earnings is a flow measurement and equity is a point-in-time measurement. No arguments here, but your point seems to be more appropriate for an Accounting 101 course rather than on a blog about Asset/Liability Management... ...read more... | Originally published 5/05/2011

I use these two terms almost on a daily basis. Indeed I’ve talked about earnings and equity simulations numerous times on this site; the latest covering a very specific relationship between the two... ...read more... | Originally published 4/28/2011

So you’ve decided which type of interest rate risk stress-test you’re going to run. Now you have to decide how you’re going to change rates... ...read more... | Originally published 4/08/2011

The next time your regulator or auditor says you must use better prepayment data instead of bank estimates - “instead use something like Bloomberg,” consider this......read more... | Originally published 3/16/2011

This is a really great question. It's also a very common one. I can appreciate the difficulty bank management has trying to explain this to the Board. I've been in that situation many, many times with a number of our clients over the years. ...read more... | Originally published 3/15/2011

Following last year’s IRR Advisory from the regulators (indeed ever since the original Joint Policy Statement in 1996) industry experts, auditors, accountants, analysts, and regulators have been throwing around IRR stress-test terminology.
...read more... | Originally published 3/08/2011

Following last year’s IRR Advisory from the regulators (indeed ever since the original Joint Policy Statement in 1996) industry experts, auditors, accountants, analysts, and regulators have been throwing around IRR stress-test terminology.
...read more... | Originally published 2/25/2011

I’ve heard both sides of the “out-sourced” versus “in-house” modeling debate... ...read more... | Originally published 1/11/2011

Although these accounts reprice immediately, it’s the nature of their repricing that causes problems on the gap report. ...read more... | Originally published 4/12/2010

There’s a new FDIC Advisory on Interest Rate Risk Management. We’ve had a high volume of phone calls asking us if we’ve seen the “new guidance”...
...read more... | Originally published 1/08/2010

...A key component of model validation is a back test. Interest rate risk measures in particular rely heavily on forecasts. ... ...read more... | Originally published 8/24/2009

Most gap reports (including the Call Report's) are missing the impact of things like amortizing principal payments, principal prepayments, and calls... ...read more... | Originally published 4/21/2008

What's the most misunderstood concept in interest rate risk measurement? There is probably a six or seven-way tie for first place on that list....
...read more... | Originally published 9/21/2007

What's the most misunderstood concept in interest rate risk measurement? There is probably a six or seven-way tie for first place on that list....
...read more... | Originally published 8/30/2007

When I'm asked, "What sort of work do you do?" I'm never sure quite how to answer. When I started working in this business my answer to this question was, "I help community banks measure and monitor their interest rate risk..." ...read more... | Originally published 8/30/2007

One of the most misunderstood areas of asset/liability modeling is the treatment of core deposits. It’s not that the concepts are particularly hard, it’s just that people tend to confuse different techniques, or assume that’s there is a one size fits-all-approach. ...read more... | Originally published 2/28/2007

A favorite part of my job is seeing the “ah-ha!” moment of understanding about interest rate risk...Over the years the most common “ah-ha!” moment happens when I’m talking with a Board of Directors about interest rate risk... ...read more... | Originally published 2/12/2007

The decay rates essentially are an assumption about the average life of your non-maturity deposits. ...read more... | Originally published 1/18/2007

Just so we’re clear, I hate the gap report as an interest rate risk tool. ...read more... | Originally published 1/12/2007

...reviewing with a bank client (and his examiner) yesterday one of the short-comings of the gap report as an interest rate risk measurement tool. ...read more... | Originally published 1/11/2007

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