Capital Markets Examiner School, Providence, RI

Scenarios – Time Horizon

2010 Interagency Advisory on IRR “When using earnings simulation models, IRR exposures are best projected over at least a two-year period . Using a two-year time frame will better capture the true impact of important transactions, tactics, and strategies taken to increase revenues which can be hidden by viewing projected results within shorter time horizons.” 2012 Interagency Advisory FAQ “To capture this potential “cliff effect,” exposures should be projected over at least a two-year period. To understand how risk evolves, management is encouraged to measure earnings-at-risk for each 12-month period over the simulation horizon.”

Scenarios – Time Horizon

2010 Interagency Advisory on IRR “…to fully assess the impacts of certain products with embedded options, longer term horizons of five to seven years are typically needed .” 2012 Interagency Advisory FAQ “Long-term simulations can provide a complementary metric to “risk-to- capital” measurements, allowing institutions to understand how interest rate shifts could affect future earnings over longer time horizons.”