Pub. 5 2016 Issue 5

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 20 A S INSTRUCTIVE IDIOMS GO, “hope for the best but prepare for the worst” is a good one. While recognizing the human tendency for optimistic expectations, it acknowledges the practical contingency that an undesirable outcome may occur. It also exhorts us to be ready for it. For community bankers trying to prepare for a higher interest rate environment, the exercise of modeling the potential risks to earnings and capital is an attempt to do just that. By projecting the changes that happen to interest income and interest expense when the repricing of earning assets and paying liabilities occurs in higher rate scenarios, risk managers can quantify the potential results a higher rate climate might produce. In a recently published Range of Practice Memorandum, results of surveys conducted by the Office of the Comptroller of the Currency reveal only a small number of institutions reported elevated levels of interest rate risk. Quite naturally, the reported risk measurements were the surveyed banks’ modeling results, and that’s where hoping for the best collides with preparing for the worst. HOW THE COW ATE THE CABBAGE: ARE YOUR INTEREST RATE RISK REPORTS GIVING YOU THE UNVARNISHED TRUTH? By Lester F. Murray, Associate Partner, The Baker Group LP