Regulatory Compliance :
Earnings can be put at risk by many things. Traditional rate shock and linear rate ramp scenarios test for repricing and option risk, but they don't assess the potential basis risk exposures from varying driver rate speeds and yield curve shape changes. This can be a serious limitation.
MPS Smart Ramps are non-linear projections of future interest rates. In the ramp forecasts, the 3-month Treasury rate acts as the catalyst for other ALM model driver rates. In the yield curve shape change projections, the 3-month and 10-year treasury rates both have a role. Based on scenario specified changes in catalyst rates, all other driver rates follow based on their historic spreads, as statistically estimated by MPS from data since 1972.
MPS Smart Ramps are suggested as an alternative standard earnings at risk IRR test. Projections are refreshed each month but the fundamental paths of driver rates remain comparable month to month. This compares to true forecasts, which often have too much variability from period to period to be of value.
Earnings at risk IRR analysis precision is enhanced by using MPS Smart Ramps and the scope of the analysis is expanded. This creates stronger IRR compliance.