Preparing for the Inevitable Rise in Rates

Last week, the Federal Financial Institutions Examination Council ("FFIEC") issued an advisory to all U.S. financial institutions to prepare for the inevitable rise in interest rates.  Specifically, they provided recommendations for the proper management of market risk or interest rate risk ("IRR").  Here is a summary of their expectations.

Current financial market and economic conditions present significant risk management challenges to institutions of all sizes. For a number of institutions, increased loan losses and sharp declines in the values of some securities portfolios are placing downward pressure on capital and earnings. In this challenging environment, funding longer-term assets with shorter-term liabilities can generate earnings, but also poses risks to an institution’s capital and earnings.  This advisory re-emphasizes the importance of effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to the IRR exposures of institutions. It also clarifies various elements of existing guidance and describes selected IRR management techniques used by effective risk managers.

The regulators are certainly concerned about financial institutions becoming complacent due to the historically low funding rates.  In addition, they surely do not want to be criticized again for working to prevent problems that will inevitably occur as part of any business cycle.  Financial institutions of all sizes will be wise to address these recommendations sooner rather than later.  Wheelhouse Advisors can help.  Visit www.WheelhouseAdvisors.com to learn more.