Pub. 2 2014 Issue 2

spring 2014 21 about the reporting tools that they have at their disposal: 1. Do we have reports that project secu- rities depreciation relative to capital in a rising rate environment? 2. Does our IRR model shock the fair value of regulatory and risk-based capital ratios as well simple equity capital? 3. Do we have a way to model faster re-pricing liabilities relative to earning assets? 4. Are “floors” on loans modeled prop- erly in our IRR system? 5. Do we have reports that show how our balance sheet liquidity is affected by rising interest rates? 6. What if we just want to look at securi- ties cash flow? Risk Management decision-making de- pends on thorough and meaningful data in a useable report format. The five questions above are good ones to consider when assessing the adequacy of an IRR report- ing system. Risk, Capital, and Stress Tests It makes good sense to measure and monitor the relationship between unreal- ized losses and capital. And this extends to various measures of capital itself. For example, if we apply the mark-to-mark adjustment for securities to risk based capi- tal measures, we can more closely capture a total picture of the bank’s relative risk. All else being equal, a bank that makes relatively few loans can sometimes justify a higher level of interest rate risk than a bank with a high loan/deposit ratio. Sim- ilarly, well-capitalized banks with pristine asset quality can tolerate more interest rate risk than those with high “Texas Ratios.” Institutions should run stress tests on assumptions for non-maturity deposits in IRR models to identify exposure to rising rates and higher interest expense. Back tests and assumptions reviews should ensure that floors on loans are being mod- eled properly. The dynamics of balance sheet cash flows should be reported and reviewed, and investment cash flow pro- jections tracked for different rate environ- ments. Banks have again been given a “heads up” from examiners on interest rate risk. With proper reporting tools, good policies, and sound processes, the regulatory challenge can be met and the potential risks man- aged for a smooth and profitable 2014. Since 1979, we’ve helped our clients improve decision-making, manage interest rate risk, and maximize investment port- folio performance. Our proven approach of total resource integration utilizing soft- ware and products developed by Baker’s Software Solutions* — combined with our solid investment experience and advice — makes us the investment firm of choice for many community financial institutions. n For more information, contact Jeff Caughron at The Baker Group: 800-937-2257, www.GoBaker. com, or email: jcaughron@GoBaker.com . *The Baker Group LP is the sole authorized dis- tributor for the products and services developed and provided by The Baker Group Software Solutions, Inc. Jeffrey F. Caughron Associate Partner The Baker Group LP Snell & Wilmer.............................................................. Page 2 Mountain West Small Business..................................... Page 9 Premier Data................................................................. Page 9 The Coalition of Bankers Associations . ....................... Page 10 Federal Home Loan Bank ............................................ Page 26 Chapman and Cutler LLP............................................. Page 27 Reich & Tang . .............................................................. Page 30 Jones Waldo................................................................ Page 31 Eide Bailly.................................................................... Page 32 ADVERTISER INDEX ISSUE2.2014 SPRING OFFICIAL PUBLICATION OF THE UTAH BANKERS ASSOCIATION DDoS:WhatYou Need to Know