2025 Risk Series:  Interest Rate & Liquidity Risk Management

The Regulatory Risks

Interest rate and liquidity risk management are critical concerns for regulators in 2025, as banks navigate economic uncertainty and shifting monetary policies. With recent rate cuts and ongoing inflationary pressures, the OCC, FDIC, and FRB have emphasized the need for robust frameworks to manage funding, liquidity stress testing, and asset-liability strategies. Poor liquidity management can lead to regulatory enforcement, financial instability, and even institutional failure.

Example Enforcement Actions

• Bank of Brenham (2024):  OCC Cease and Desist Order from the OCC due to failures in liquidity stress testing and contingency funding plans.

• First Federal Savings Bank of Kentucky (2024):  Entered into a Formal Agreement with the OCC for deficiencies in liquidity risk management and interest rate risk oversight.

• First National Bank of Bellville (2024):  OCC Cease and Desist Order for deficiencies in liquidity risk management and excessive exposure to long-term securities.

• MinnStar Bank (2024):  Entered into a Formal Agreement with the OCC for violations related to asset-liability management, requiring corrective measures to improve liquidity controls.

Key Risks to Address Now

• Liquidity Risk & Funding Gaps:  Banks must ensure sufficient liquidity buffers and contingency funding plans to handle market fluctuations.

• Interest Rate Sensitivity:  Poorly structured balance sheets can expose banks to excessive risk in changing interest rate environments.

• Asset-Liability Management (ALM) Deficiencies:  Misaligned asset and liability structures can lead to profitability and capital adequacy concerns.

• Regulatory Compliance & Stress Testing:  Institutions of all sizes should conduct stress testing as a best practice, and maintain compliance with evolving regulatory expectations.

Strategies to Strengthen Risk Management

• Enhance Liquidity Risk & ALM Frameworks

  • Implement real-time liquidity monitoring tools and early warning indicators.

  • Strengthen contingency funding plans and ensure access to diverse funding sources.

• Improve Interest Rate Risk Sensitivity Modeling

  • Utilize dynamic scenario analysis to evaluate potential rate shifts.

  • Adjust lending and investment strategies to mitigate earnings volatility.

• Strengthen Governance & Compliance Measures

  • Conduct regular internal testing to assess risk exposure under adverse scenarios.

  • Align risk policies with supervisory guidance and industry best practices in liquidity management.

Take Action Now

Community banks must proactively address interest rate and liquidity risk management to maintain regulatory compliance and financial stability. Strengthening risk frameworks, conducting stress tests, and optimizing asset-liability management will help institutions navigate evolving market conditions.

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Stay tuned for the next edition in our blog series:  "Deposit Insurance & Consumer Protection Risks."