A Framework for Interest Rate Risk Management

Banks are often unknowingly exposed to risk due to balance sheet structure, and they often seek to change that composition through pricing and customer incentives. While this approach can be effective, it takes a long time and tends to be costly.

The key to avoiding this risk is to accurately quantify your exposure to interest rate movements.

  • Determine your strategy: Specify your risk appetite in relation to your annual objectives. What limits exist and what is their impact on your net interest income? Map the relevant policy statements to OCC-defined risk categories, and develop procedures to implement the policy statements.
  • Measure and monitor: Measure interest rate sensitivity and analyze potential hedge structures to move towards your objective.
  • Implement and execute: Recommend potential hedge structures and strategies. Simplify needless complexity, and compare the impact of alternate hedging strategies on net interest income.
  • Evaluate and assess: Address the regulatory, governance, credit accounting, and educational requirements of each recommendation and create a plan to execute.

By using these strategies, Grayline can optimize you institution’s unique objectives and constraints relative to profitability, liquidity, cash flow and income at risk, as well as operational, regulatory, and accounting considerations. A successful framework for interest rate risk management must combine leading practices with regulatory and accounting guidance, with specific attention paid to an institution’s unique risk appetite and strategic objectives.

To learn more about how Grayline can help with managing interest rate risk, contact us.

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