Costs are rising everywhere. Whether you’re buying eggs for breakfast or gas for your weekly trip to visit family, everyone is feeling the shift in economy in some way or another.
This environment can place stress on families, individuals and businesses, but it can also have a large impact financial institutions (FIs). Times like these are often characterized by a rise in interest rates, which are fundamental to the business of banking. Rapid changes in rates can affect an FI’s sources of revenue and lower the total value of its assets and liabilities. Without having risk management strategies in place, these changes can have significant impacts on an FI’s financial safety and soundness.
While we can’t lower the cost of your breakfast, we can give you some tips on how to understand the interest rate increases and best prepare your institution to weather them.
Understanding Interest Rate Risk Within an FI
With the current rising interest rate environment, FIs are at risk of being significantly impacted. Understanding this risk is essential to succeeding in today’s environment. Interest rate risk is the product of multiple macroeconomic and market factors, including:
- Repricing Risk
- Basis Risk
- Yield Curve Risk
- Option Risk
- Price Risk
While rapid changes in interest rates can increase risk and affect the institution’s overall assets, it can also affect the FI’s financial products, including certain types of deposits and fixed-rate loans.
Methods for Managing Risk
While the initial risk is inevitable, FIs do have methods to detect, monitor and regulate interest rate risk. By employing one or several of the following strategies, and enacting a robust risk and credit committee oversight, FIs can curb the risk they face.
- Understanding and Identifying Interest Rate Exposure
- Evaluating Interest Rate Risk
- Identifying the Causes for Interest Rate Risk within Portfolio
- Measuring Interest Rate Risk
- Applying Interest Rate Risk Learnings to Portfolio Strategy
- Implementing a solution like nCino’s Pricing and Profitability
In today’s rapidly changing rate environment, it is increasingly important for FIs to understand and take action to prevent significant risk to their institutions. For a more comprehensive analysis of the current environment and ways to recognize and prevent interest rate risk at your FI, download our latest white paper now:
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