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