TIB Ticker - Defending IRR Exams?

October 05, 2012Daily Rates & Viewpoints From the Officers & Staff of TIB.

Defending IRR Exams?

Tis the season of regulatory focus on interest rate risk. As a result, we’ve been spending a good part of our time helping bankers address questions and comments during and from their interest rate risk exams.

For instance, when the 2010 Advisory on IRR was published, and then again when the 2012 FAQs were issued, the regulators had an opportunity to put to rest once and for all the notion that using the gap report as a stand-alone measurement of earnings sensitivity is no longer sufficient in and of itself. The FAQs did say, to quote, “all institutions are encouraged to use earnings simulations” and that “technology now makes simulation modeling accessible for all institutions”. So, to be sure, there is a clear inference (and apparent preference) that earnings simulation is the better alternative.

Just this week, we received a request from a banker asking our opinion of exam comments that his interest rate risk management practices were deficient. The reason cited for that deficiency was that, contrary to their IRR report (which reflects an asset sensitive bank) the bank must be liability sensitive because it is negatively gapped. However, many banks are negatively gapped BUT asset sensitive. The repricing gap is just one of the factors used to determine interest rate risk. The other three are sensitivity (or beta) of the cash flows when rates change, repricing differences in cash flows when rates change, and optionality.

Further, there was some discussion about non-maturity (NMD) decay (which applies to EVE only) and the beta (which applies to earnings at risk). Apparently, it was thought that the bank is using a 10% decay rate, when in fact the 10% is the beta for NMDs. The thought was that the Bank’s decay rate assumptions are half of the “FFEIC default decay rates”, when in fact the Bank is using decay rates (based on research) that are similar to the assumptions in the FDICIA Supervisory Model.

One of the more serious points of disagreement was whether or not the bank was using unsupported assumptions. The two most influential assumptions in a model are the sensitivity (or beta) of the NMDs and the decay rate of those NMDs. This bank had done historical studies to support both of the assumptions.

There were numerous other, less serious, points of discussion and I won’t take the time to detail those here. As always, TIB is here to help in any way we can. Have a great weekend.

Linda Clement Linda Clement
ALM Advisor/ALX Consulting, Inc.
lclement@mybankersbank.com

Market Levels @ 8:13 AM CDT

TIB Fed Funds & MMDA Rates - Previous Day
Agent	0.20%	Prin	0.05%	MMDA	0.30%
Agent	0.20%	STAR Prin	0.10%	STAR MMDA	0.35%

Key Indices/Commodities
1 - Month LIBOR	0.21%	Dow Jones	13575.36
3 - Month LIBOR	0.35%	NASDAQ 100	3149.45
1-Yr LIBOR	0.95%	S&P 500	1463.30
1-Yr CMT	0.18%	Spot Gold	1787.00
Prime	3.25%	Spot Silver	34.82
3-yr LIBOR Swap/Offer	0.47%	Spot Crude Oil	91.13
5-yr LIBOR Swap/Offer	0.81%	CRB Index	310.45
3 Mo - Fed Fund Futures	0.13%	6 Mo - Fed Fund Futures	0.12%

US Treasury Yields		US Non-Callable Agency Yields
Yield	Maturity	Yield	Spread
0.00%	90 - Days
0.04%	180 - Days
0.21%	2 - Year	0.26%	5bp
0.29%	3 - Year	0.37%	8bp
0.63%	5 - Year	0.80%	17bp
1.70%	10 - Year	1.92%	22bp
2.92%	30 - Year
149 BPs		Yield Curve(2's-10's)

Sample 1x Callable Agency Issues
Description	Call Date	YTC	YTM
FNMA 1.37 04/17/20	4/15	1.37%	1.37%

Select MBS Levels
Description	Coupon	Yield	Spread/Duration*
15-Yr FNMA	3.00%	1.31%	82 / 3.73
30-Yr GNMA	3.50%	2.31%	70 / 7.74
*Duration @ 12 month Historical CPR

Morning Commentary:	Reed Bateman
September’s nonfarm payroll release came in as expected, up 114K for the month, but the real market mover is the revision to the prior month’s release. August payrolls were revised higher from an increase of 96K to 142K – that’s a fairly large revision. Private payrolls didn’t match the nonfarm results, as they increased less than expected last month, up only 104K, and were revised lower for August. The biggest surprise is the decline in the unemployment rate from 8.1% to 7.8%, but that decrease was led by businesses adding more part-time workers. The underemployment rate remained at 14.7% which consists of marginally attached works, as well as the unemployed. The rate decline and the high revision in August have led to a selloff in Treasuries. The 10-year note is off about a half a point, yielding 1.72% at 8:15 central, which is the first time since the 25th of last month the rate has been above the 1.70% level. We’ll have additional supply next week with the Treasury set to auction $66B in 3 and 10-year notes and the 30-year bond.

Morning Commentary:

Reed Bateman

September’s nonfarm payroll release came in as expected, up 114K for the month, but the real market mover is the revision to the prior month’s release. August payrolls were revised higher from an increase of 96K to 142K – that’s a fairly large revision. Private payrolls didn’t match the nonfarm results, as they increased less than expected last month, up only 104K, and were revised lower for August. The biggest surprise is the decline in the unemployment rate from 8.1% to 7.8%, but that decrease was led by businesses adding more part-time workers. The underemployment rate remained at 14.7% which consists of marginally attached works, as well as the unemployed. The rate decline and the high revision in August have led to a selloff in Treasuries. The 10-year note is off about a half a point, yielding 1.72% at 8:15 central, which is the first time since the 25th of last month the rate has been above the 1.70% level. We’ll have additional supply next week with the Treasury set to auction $66B in 3 and 10-year notes and the 30-year bond.

Information contained herein is based on sources we believe to be reliable but its accuracy is not guaranteed. Customers should rely on their own outside counsel or accounting firm for specific circumstances. The securities, yields or levels discussed herein are for illustration purposes and are not guaranteed, not obligations of any bank, thrift or other entity and are not insured by the FDIC.

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