The State of Interest Rate Risk Management

REPORT PREVIOUSLY PUBLISHED BY OLIVER WYMAN

The interest rate environment has been nothing but extraordinary during and after the crisis. Many countries are still at historically low levels of interest rates with a steep yield curve as a result of the crisis and unorthodox monetary policy responses. In the face of many levels of uncertainty such as credit growth, the financial markets, the banking environment, and the continuation (and eventual reversal) of unorthodox monetary policies, interest rate risk (IRR) management presents challenges for financial institutions of all sizes. In particular, institutions face the challenge of generating higher net interest income (NII) while maintaining IRR levels within acceptable limits.

Oliver Wyman recently performed an industry survey on interest rate risk management across a group of eighteen North American banks. The survey set out to examine how banks are responding to uncertainty through their IRR management and measurement practices. In this report, The State of Interest Rate Risk Management, Oliver Wyman presents salient conclusions from its observations and experiences, points out avenues that will shape the evolution of industry practices, and provides a summary checklist for financial institutions. The authors also discuss implications for balance sheet management in an era characterized by a myriad of market and regulatory constraints pressuring banks.