BAS Case Study - March 2023




Loans:  What is the term structure based on stated maturities? (RC ‐ C Part I Memoranda; IRRSA) o Consider: for the Call Report, variable rate loans at a floor interest rate are reported according to their contractual maturity dates.  Variable rate or fixed rate? (might be shown on the general ledger, or within the interest rate risk report) o If variable rate, are there floors/ceilings? If at the floor rate, how much would the index rate have to increase before loan rates adjust upward?  Are interest rate swaps utilized? (consult a subject matter expert if these are identified) Securities:  Maturity structure? (duration from inventory report; stated maturities from RC ‐ B Memoranda; IRRSA) o Consider: depending on the rate environment, duration figures could be based on callable dates rather than maturity dates.  Volume of callable and/or structured securities (e.g. step ‐ ups)? (securities inventory; RC ‐ B) Interest Rates Callable Bonds are: Investor is… ↑ Not called Stuck with lower yielding issues, relative to current rates.  ↓ Called Forced to reinvest proceeds in a lower ‐ yielding environment.   Amount of mortgage ‐ backed securities? (securities inventory; RC ‐ B) o Consider: Unlike bullet bonds where all of the principal is paid at maturity, mortgage ‐ backed securities amortize with regular principal reductions as the underlying mortgages are paid. Interest Rates MBS Prepayments: Investor has… ↑ Decline Less cash flow to reinvest in a higher ‐ rate environment.  ↓ Increase More cash flow to reinvest in a lower ‐ rate environment.  Asset Mix: (UBPR page 4)  In general, loans are shorter ‐ term than securities.  Federal Funds sold are immediately reprice ‐ able; and interest ‐ bearing balances are typically short ‐ term.  If a large volume of time certificate of deposit investments are held, review the maturity structure. If longer ‐ term, how stiff are the prepayment penalties for early withdrawal?

Deposits:  Volume of non ‐ maturity deposits (e.g. savings, NOW, money market) vs. time certificates with known maturities. (RC ‐ E – Memoranda; IRRSA)  Stability of the core deposit base? (cost of deposits on UBPR page 3, changes in deposit volume over time on UBPR page 4; IRRSA) o A large and stable core deposit base allows for greater pricing flexibility (e.g. ability to lag rate increases). o While banks have less control over the cost of brokered and listing service deposits, these can help offset risk exposure due to the ability to select specific desired maturities (e.g. obtain longer ‐ term brokered CDs to match longer ‐ term assets). Borrowings (e.g. FHLB advances):  Consider maturity structure and terms. Variable ‐ rate or fixed rate? Convertible? (borrowing statement) o Borrowings are often used as a tool to manage IRR exposure. Capital:  Is the level sufficient for the amount of interest rate risk being taken?  A bank with high levels of exposure relative to its capital will be directed to take corrective action.

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