Wishful thinking, sorry folks. None of the regulatory bodies (federal or state) has specified a benchmark or red-flag limit for IRR measurements. The closest thing to an actual red-flag is in the OCC's Canary Ratios under Interest Rate Risk, but NIEAR and EVEAR are not included in the list. They only look at static balance sheet measurements like Total Assets Maturing or Repricing longer than 5 years, or Total Residential Real Estate Loans to Total Assets, etc.

That doesn't mean that the regulators haven't shared some useful information with the industry. While attending a banking conference in 2002 I heard a presentation by Kathryn Dick of the OCC. She shared with the group the results of a survey taken by OCC field examiners. During each bank exam they recorded the bank's IRR policy limits in a database. Here are the summary results of their survey:

I've heard that this data was updated in 2005 but I haven't seen the information.

**Assigning meaning to EVE at Risk measures**The thrift regulators (OTS) have defined various levels of EVEAR as "Minimal Risk", ""Moderate Risk", "Significant Risk", and "High Risk". To determine your level of risk you need to calculate the bank's EVE ratio which is just simply the basic Equity to Asset Ratio on a market value basis (instead of a book value basis).

First compute your EVE ratio in a base case. Suppose the value of your assets was $216,571, and your EVE was $21,891, your base case EVE ratio would be 10.15%. Next look at each of the shock scenarios (typically the +/-200bp shocks), and calculate the EVE ratio for each of them. One of them usually produces an EVE ratio that is * worse* than your base case. Determine which one that is, and calculate the basis point change from the base EVE ratio. In my example the worst case shock is rates up where the EVE ratio is 8.50%, a change of -165 basis points from the base ratio.

Once you have those two numbers you can apply them to this colorful graph (click on it to make it larger):

So you may want to set your policy limit to be "no higher than Moderate Risk", instead of targeting an actual EVEAR number.

Next Question: What is our comfort level?

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