Interest Rate Risk Assessment
An IRR assessment can help you match your institution’s desire for profitability and financial health while meeting regulatory and audit expectations. We can assist with an interest rate analysis or provide an independent review.
Your Bank Needs an Independent IRR Review
Interest rates are on the rise.It’s important for banks to assess the potential threat rising ratings will have onEarnings and Capital. Loan portfolios are growing and also influenced by rising rates as investments are leveraged to fund new loan opportunities. Revisiting the investment needs and strategies of the bank as rates change can ensure an organization’s goals match the current economic environment.
What Gap Analysis Can Tell You
A gap analysis helps you assess the measure of risk associated with your current asset and liability balance. When interest rates change, the difference (or “gap”) between your earning potential andliability costs can expand or contract, potentially putting your net income at risk.
A gap analysis provides a forecast of interest rates and time intervals reflecting the impact repricing of assets and liabilities have on earnings. By grouping the assets and liabilities into these intervals and calculating the gap for each, also referred to as the ratio of Rate Sensitive Assets to Rate Sensitive Liabilities (RSA/RSL) you candetermine how changes in the interest rate environment will impact cash flow.
Earnings Sensitivity Analysis
This analysis adds to Gap Analysis by allowing your bank’s management to quickly focus on the impact different rate changes can have on spreads between asset yields and liability interest costs. Similar to stress-testing loan scenarios, Earnings Sensitivity identifies the impact of interest rate changes on balance sheet composition.
Earnings sensitivity analysis involves forecasting future interest rates, predicting the exercise of embedded options and repricing of specific assets and liabilities. By repeating this process through a range of different rate environments, you’ll have a multifocal approachto help you predict what will happen to the composition of assets and liabilities.
Know Your Economic Value of Equity (EVE)
EVE is the economic value of assets less economic value of liabilities. It is a measurement of the impact interest rate changes has upon the value of assets, liabilities and equity. EVE identifies the change in economic value of your bank under a number of risk rate scenarios.
Your business’s EVE is essentially the net present value of your cash flows — your asset cash flows minus your liability cash flows. Monitoring changes in EVE provides a comprehensive measurement of interest rate risk for your bank. Examiners are also monitoring this percentage change in fair market value as it best reflects all anticipated cash flows for an organization. Knowing (and having confidence in) this figure can ensure your gap analysis and any earnings sensitivity analysis are as accurate as possible.
Rising interest rates are likely to affect a bank’s earnings positively in the loan balances but, may negatively impact bond and investment portfolios and potentially lower net interest income.
IRR assessments may be needed to identify potential earnings at risk and gaps in net income. An independent review of your IRR can provide a comprehensive evaluation of a bank’s earning assets and potential capital needs to match strategic goals and limit risk to earnings.
Why Bank Strategic Solutions?
We do more than just help your bank stay one step ahead of regulations and bank examiners. We take a proactive, holistic approach to the soundness of your institution and we focus on positive ways that your bank can stay compliant and profitable.
In addition to a full IRR review, let Bank Strategic Solutions help you with:
- Asset Liability Management
- Credit and Lending Risk Management
- Mergers and Acquisitions
- Operational Risk
- Strategic Planning
Questions about what we can do for you?
Bank Strategic Solutions has the tools and industry expertise to assist your bank. Let us help
you manage risk so you can focus on maximizing performance.