Regulatory pressure mounts for interest rate risk and liquidity management

Regulatory pressure related to interest rate risk (IRR) and liquidity has increased, and institutions’ risk management practices need to adjust to meet the challenges.

Expectations around liquidity and IRR management programs have increased since the Silicon Valley and other bank failures in 2023. Recent guidance from supervisory agencies has reiterated the importance of strong risk management.

In response to the failures, in July 2023, the agencies — the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency — issued updated guidance on liquidity risks and contingency planning. The updated guidance reminded institutions to maintain actionable contingency funding plans (CFPs) that account for a range of possible stress scenarios. The guidance also reminded institutions that if the discount window was a part of the CFP, then the institution should establish and maintain operational readiness to borrow from the discount window.

Following that, in its Supervision and Regulation Report from November 2023, the Federal Reserve Bank executive summary stated it was “taking steps to enhance the speed, force and agility of its supervision, as appropriate, to reflect lessons learned from recent large U.S. bank failures and its supervision of Silicon Valley Bank.”

The report stated that the Federal Reserve Bank planned to improve its supervision of liquidity and IRR. These improvements included conducting “targeted reviews at banks exhibiting higher interest rate and liquidity risk profiles,” as well as conducting training and outreach for banks and regulators.

Subsequently, in 2024, the Bank Supervision Operating Plan from the Office of the Comptroller of the Currency stated that its risk-based supervision will focus on a variety of areas, including asset and liability management (ALM). The priority objectives stated, “examiners should determine whether banks are managing interest rate and liquidity risks through [the] use of effective asset and liability risk management policies and practices, including stress testing across a sufficient range of scenarios, sensitivity analyses of key model assumptions and liquidity sources and appropriate contingency planning.”

The timing of these and other updates underscores the critical importance of liquidity and IRR management programs.

As liquidity pressure rose in 2023, Wipfli shared an article on mounting liquidity pressures for banks and credit unions. Liquidity management remains a critical practice for institutions, including several essential risk practices, such as:

• Frequent liquidity monitoring.
• Reviewing pro-forma cash flow statements and stress tests.
• Understanding institution-specific funding risks.
• Reviewing and updating your institution’s CFP.

Continually assessing the strength of your liquidity and IRR management programs is critical during times of increased stress and scrutiny.

With the bank failures of 2023 still looming in regulatory and industry circles, heightened expectations for managing liquidity and IRR will persist. Especially now, it’s critical for asset-liability committees (ALCOs) and institution management to employ prudent risk management processes that align with the institution’s unique funding risks, concentrations and strategies.

ALCOs must thoroughly understand the institution’s risks and strategies and incorporate them into the overall risk management process. Considering these factors and remaining vigilant in managing liquidity and IRR can enhance the stability and success of your institution.

How Wipfli can help

Wipfli’s liquidity risk review or IRR review can pinpoint areas of risk in your institution and provide recommendations for mitigating that risk and strengthening your institution’s liquidity and overall stability. Contact us to learn more.