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Regulatory Interest Rate Risk Directive

On January 6th, 2010 the regulators issued a directive dealing with interest rate risk in financial institutions.  It is a reminder to those institutions to review their management the “S” component of the CAMELS rating.  What institutions should take from this directive is that given where interest rates have been over the past couple of years that many banks have possibly booked longer duration assets and funded them with short-term interest sensitive liabilities.  If indeed this is the case, those banks need to be prepared to face a rising rate environment and have methods in place to monitor and control that risk.

What I have seen is that many banks go through the motions of measuring the risk and few actual put into place strategies to mitigate the risk they have created in their balance sheets.  That being the case, the directive should be listened to and implemented rather than just doing for the regulators.