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Examiners Raise the Bar on IRR: Understanding Non-Parallel Rate
Shocks
10:30 AM CDT - JULY, 20 2011
Connect To Conference Call: 1-877-860-3058
Access Code: 417317
Presented by Jim Groark and Brett Hendricks
July 20, 2011
Today’s Discussion
IRR Advisory Review
Parallel vs. Non-Parallel Rate Shocks
Non-Parallel Rate Scenarios
Understanding the Results
FFIEC IRR Advisory
“. . . In many cases, static interest rate shocks consisting of parallel shifts in the yield curve of plus and minus 200 basis points may not be sufficient to adequately assess an institution’s IRR exposure. As a result, institutions should regularly assess IRR exposures beyond typical industry conventions, including changes in rates of greater magnitude (e.g., up and down 300 and 400 basis points) across different tenors to reflect changing slopes and twists of the yield curve.”
Basel on Yield Curve Risk
“14. Yield curve risk: Repricing mismatches can also expose a bank to changes in the slope and shape of the yield curve. Yield curve risk arises when unanticipated shifts of the yield curve have adverse effects on a bank’s income or underlying economic value. For instance, the underlying economic value of a long position in 10-year government bonds hedged by a short position in 5-year government notes could decline sharply if the yield curve steepens, even if the position is hedged against parallel movements in the yield curve.”
Traditional Rate Shock
0
1
2
3
4
5
6
7
3M T-Bill 6M T-Bill 3Y CMT 5Y CMT
Current
Up 200
Up 400
Non-Parallel Rate Shock
0
1
2
3
4
5
6
3M T-Bill 6M T-Bill 3Y CMT 5Y CMT
Current
Flatten
Steepen
Inverted
Shocking Current Rates
Effect of Rate Shifts on Income and Market Value
+400 BPS Parallel Rate Shift
Steepened Curve
Flattened Curve
Short Term Rate Pivot
Non-Parallel Scenarios
Likely vs. Unlikely
Non-Yield Curve Rates
Non-Yield Curve Rates
Non-Parallel Scenarios
NIM Simulation
Inverted Curve
EVE Simulation
Short Term Rate Pivot
Review
• Run Parallel Shocks +-400 BPS and Non-Parallel of significant magnitude
• Be prepared to run NIM shocks greater than 1 year
• Scenario Analysis can identify opportunities and pitfalls
• An efficient Process will leave more time to be a banker!
Examiners Raise the Bar: Understanding Non-Parallel Rate
Shocks
Thanks for attendingBrett Hendricks1-800-323-3281
July 20, 2011