Your Risk Monitor system provides you, and the bank’s Board of Directors as required in regulation, with an analysis of the effect that changing interest rates in the economy would have on your bank’s financial performance. With the Risk Monitor report, taken in conjunction with bank policy, you are able to measure, monitor and control the financial exposure of the bank to its environment, and to understand the bank’s current financial performance in terms of the interest rate risk profile it is adopting.

While it allows limited scenario analysis capability, Risk Monitor is not primarily a decision-support model. The Risk Monitor system is designed to be the equivalent of a staff expert, working for you. Your Risk Monitor applies today’s best analytical methods, in combination with reasonable assumptions (all of which are disclosed and, if appropriate, adjustable based on your unique situation), to estimate the impact of different interest rate environments on your bank. Risk Monitor then reports its conclusions – including detailed explanations, with both depth and clarity, for direct integration into your bank’s governance process.

Risk Monitor asks – and answers – the two questions that are central to measuring and managing your bank’s interest rate risk on an ongoing basis:
1) How will the Net Interest Margin from the bank’s current balance sheet change in the next year if interest rates are unchanged and how would this estimate be affected by different rate conditions?
2) What would happen to the market values of the bank’s assets and liabilities and, by subtraction, the liquidation value of the bank’s equity, at varying interest rate levels?

The first question addresses the traditional definition of “interest rate risk”, applying differing relative rate sensitivities (“betas”) to the maturity schedule of each balance sheet category and subjecting the whole to changing rates – immediate “shock”, and also a more realistic “ramped” scenario – to estimate the resulting change in margin. The second recognizes that changing interest rates affect equity and liquidity, the bank’s two sources of strength and viability, as well as short-term income. The program brings the most modern evaluation techniques to bear on the structure of the bank and reports its “EVE” risk estimate in clear, transparent terms – including an evaluation of the before-and-after capacity of the bank for comparison to policy limits set by the Board of Directors.

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