Financial institutions should make frequent use of stress tests and have well established risk measuring and monitoring systems to guard against the risks caused by rising interest rates, a committee made up financial regulators, including the NCUA, said today.
"Institutions should ensure their scenarios are severe but plausible in light of the existing level of rates and the interest-rate cycle," said the advisory from the Federal Financial Institutions Examination Council.
The Federal Reserve has kept interest rates unchanged since the middle of last year but several Fed officials have said higher rates could be forthcoming as the economy shows signs of improving.
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"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," according to the council's 11-page report.
The council said that institutions can mitigate their risk by altering its balance sheets. Other solutions include: raise additional capital, reduce levels of interest rate risk exposure and strengthen an institution's risk management expertise.
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