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Non Maturity Deposit Assumptions &

Net Economic Value Sensitivity Analysis

Regulatory Views on Interest Rate Risk

FSOC: Regulatory agencies...continue their scrutiny of the ways in which potential changes in interest rates could adversely affect the risk profiles of financial firms.

Financial Stability Oversight Council (FOSC) 2013 Annual Report

FDIC: Effectively managing interest rate risk is part of the business of banking...significant, unmitigated levels of interest rate or market risk can lead to losses and liquidity constraints...

Federal Deposit Insurance Corporation (FDIC) Supervisory Letter FIL-46-2013

NCUA: Interest rate risk is the most significant risk the industry faces right now.

National Credit Union Administration (NCUA) Letter to Credit Unions 13-CU-02

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Regulatory Views on Interest Rate Risk

OCC supervisory staff will focus on IRR measurement processes to ensure management assesses vulnerability to changes in interest rates and, as appropriate, implements measurement tools to monitor and control this risk.

The adequacy of interest rate stress scenarios and the appropriate support for key modeling assumptions (nonmaturity deposits in particular) will be a particular focal point.

Office of the Comptroller of the Currency (OCC) Semiannual Risk Perspective for Fall 2013

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Regulatory Views on Interest Rate Risk

Common errors observed during FDIC examinations:

? Assumptions were not regularly updated or were not reasonable for a given interest rate shock scenario (prepayments or non-maturity deposit price sensitivity and decay rates) or did not take into account specific characteristics of certain assets and liabilities (influence of loan floors and caps on rate exposure).

? Stress tests did not incorporate significant rate shocks (+300 and +400 basis point shocks) and other severe but plausible scenarios specific to the particular risk of the bank.

? Results of stress tests were not compared to internal risk limits.

FDIC Supervisory Insights: Winter 2013 Edition

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Regulatory Views on Interest Rate Risk NCUA Long Term Asset Ratio : The sum of real estate loans which will not refinance, reprice or mature within 5 years, member business loans, investments with remaining maturities of more than 3 years, NCUSIF deposit, land and building, and other fixed assets divided by total assets.

Source: NCUA FPR User Guide -

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Regulatory Views on Interest Rate Risk

What is NCUA's benchmark for a maximum long-term asset ratio?

? We don't have (one). It used to be the old rule of thumb that we heard that there's this magic limit of 25% of longterm assets to total assets was the limit. That's never actually been the case.

? We do not have a prescribed or defined benchmark formally, or informally for that matter, in terms of what's too much in terms of long-term assets.

? There is not a limit but it does cause the examiner to start thinking in terms of interest rate risk and how is this credit union managing this risk.

(NCUA Director of the Office of Examination and Insurance Larry Fazio at the October 2012 Virtual Town Hall Webinar)

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Risk vs. Reward

Implementing simplistic, arbitrary, or overly restrictive controls to position the balance sheet for rising rates may create an imbalance in the risk ? reward profile.

? Only "being conservative" if rates rise ? Taking a risk position that rates will rise

Restrictive Controls

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Lost Earnings

What if Interest Rates Stay Low?

Japan's 10-Year Treasury Note 15 Years and Counting of Below 2.00% Yields

Risk taking is not risk management!

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Source: Bloomberg

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