You'll be reading a lot about this one tomorrow. A list of regulators, including "the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the Federal Financial Institutions Examination Council (FFIEC) State Liaison Committee (collectively, the regulators)" put out a press release today urging banks to stress test their interest rate exposure.
"The financial regulators are issuing this advisory to remind institutions of supervisory expectations regarding sound practices for managing interest rate risk (IRR). In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates."
There are 11 pages in total, which I find pretty bizarre. If the Regulators need to lecture the big boys on managing interest rate risk, don't we have a huge problem? Isn't the job of the banks to know how to manage this risk? Is the whole press release an effort by the Regulators to "bluff" the market, in the sense that they think they can manage interest rates by threatening to raise them or insinuating that there might be interest rate hikes, rather than by actually raising rates?
In any case, I found the conclusions on page 9 to be the most interesting, among them: "Reduce levels of IRR exposure." Really? Great idea! But... ummm.. how exactly? By buying interest rate derivatives to shift the exposure to someone else? I feel like I just discussed that - oh wait - I DID! GS "hedging" its AIG exposure buy buying protection on AIG from someone else. Can the system really reduce its interest rate exposure, or just move it around from one bank to another, or from the banks to the Fed!?! Isn't the whole problem with the system right now that the Fed is increasing interest rate exposure massively by providing near zero cost short term funding for the banks, and that once this funding goes away, the banks will have to actually pay for funds? Ah hah - maybe the Fed is telling banks to lock up some long term funding by selling corporate debt at relatively low fixed rates - to ween themselves off of the Fed's Free Money Teat..
The final line of the press release wins the "no shit sherlock" award for today:
"IRR management should be an integral component of an institution’s risk management infrastructure."
Totally bizarre... Really Regulators? Really? Interest rate risk management is important for banks? You don't say! I guess we'll watch and wait on this one...