We wrap up our overview of the OCC Semiannual Risk Perspective report with a focus on economic value of equity (EVE) or long term interest rate risk.
With key concerns over longer duration assets and fear of increased rate sensitivity for non-maturity deposit accounts, it only makes sense to examine long term EVE interest rate risk.
The OCC offers a chart of historical EVE performance (provided by Olson Research Associates) showing a subgroup of bank EVE exposure to a 200bps rate hike, ending in Q2 2013. In Q2 the levels shown averaged a 24% reduction in EVE for a 200bp rate hike.
Based upon my own proprietary interest rate risk model, calculated for all FDIC-insured banks nationwide, the average EVE risk for a 200bp rate hike at September 2013 was 22%.
Remember, that's the average EVE reduction.
The riskiest 20% of all FDIC-insured banks at September 2013 had an EVE risk exposure (reduction in economic equity) in a 200bps rate hike scenario of greater than 33%.
How does your EVE risk compare?
Email or call me if you wish to discuss how to mitigate your risk exposures.
Photo provided by Paxson Woelber.