Enterprise Risk Management Considerations for Today's Financial Institutions

by John F. Stewart
Federal Home Loan Bank of Seattle

Risk management has been a major area of focus over the last few years for many financial institutions. Most, if not all, of the largest institutions have implemented a risk management organizational structure, Enterprise Risk Management (ERM), to formalize the practice and oversight of risk. Adoption of the ERM concepts at smaller and simpler institutions is increasing, albeit inconsistently, driven by the recent financial crisis, increasing regulatory expectations, and increasing market scrutiny of risk management practices (e.g., by rating agencies and analysts).

We believe that the focus on risk management is not going away anytime soon and that regulators and other stakeholders will continue to raise the bar across a wider range of smaller and simpler institutions. For example, numerous recent regulatory initiatives (e.g., Basel III, Dodd-Frank) have substantial focus on ERM and, as proposed, would require implementation of much of what is currently practiced by only the largest and most complex institutions. In addition to regulators, external stakeholders such as rating agencies and investors are increasingly looking at risk management practices in greater detail in evaluating a financial institution. More >

Timely Wholesale Funding Strategies: The Symmetrical Prepayment Advance

by Brett L.A. Manning, John P. Biestman, and Mike Terry
Federal Home Loan Bank of Seattle

Like many others, your financial institution is likely craving loan growth. In recent weeks, you may have seen a modest pickup in C&I loans, or even multifamily activity. In certain markets, Seattle Bank members have begun to “dial-in” a portfolio of residential mortgages—some of which might be slightly out of Fannie Mae or Freddie Mac underwriting parameters. Some institutions are marketing 10-year mortgages to those in their 40s and 50s who have been in their homes for some time and want to accelerate their “forced savings.” Others are focusing on mortgages with balances that exceed conforming amounts.

Regardless of the types of loans you may be considering, extension risk is all too frequently a part of the discussion. In a rising rate environment, extension risk poses a significant obstacle on your road to financial success. Extension risk represents the downside you face when the expected redemption dates or cash flows of your assets extend, or when the expected cash flows of your liabilities shorten. It is present in all assets (like mortgages) and liabilities with optionality (e.g., puts, calls, and prepayments). If extension risk sets in, the value of your mortgage portfolio drops.

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