For Chief Risk Officers (CRO) in the banking sector, navigating the current economic landscape is no easy feat. The recent rapid and steep increase in interest rates have added to their concerns. Welcome to post #2 of the CRO series.
▪ The recent increase in interest rates was a necessary measure to combat inflation. However, like any medicine, it had unintended side effects. One of the most significant consequences was the increase in unrealized losses in banks’ fixed income securities that are held on their balance sheets. As long as these losses remain unrealized, they are harmless. However, tapping into these securities to fund cash outflows could be a problem because it means the banks will realize a loss on the actual sale. CROs are therefore employing the age-old discipline of asset liability management and collaborating with their Asset Liability Committees (ALCO) to effectively manage these risks of mismatch between assets and liabilities.
▪ Finally, an increase in interest rates makes it more expensive for borrowers to service their debt. Therefore, CROs are currently highly focused on monitoring the performance of lending portfolios for signs of deterioration. They may stress test loan portfolios, review underwriting standards, and ensure loan portfolios are well diversified across different sectors and geographies.
Stay tuned for post#3 of the CRO series where we will discuss another top concern of banks’ CROs.
Facultas-Risk Consulting Inc.
#banks #interestrates #riskmanagement
