As the Federal Reserve begins to cut rates after two years of sustained monetary tightening, banks are once again reminded of a fundamental truth: interest rate cycles are never one-directional. This shift brings renewed relevance to the 2010 Interagency Advisory on Interest Rate Risk Management (SR 10-1), a document that, despite its age, underscores timeless principles of sound ALM practices.
What was once guidance for a world emerging from the financial crisis now serves as a timely reminder that effective interest rate risk management means preparing for both sides of the cycle—protecting balance sheets not just from rising rates, but from falling ones as well.
In this article, we’ll revisit the key points of the 2010 advisory, connect them to today’s rate environment, and highlight why they matter for risk managers right now.
The Lasting Impact of the 2010 Interest Rate Risk Advisory
In January 2010, U.S. bank regulators issued a joint advisory entitled “Interagency Advisory on Interest Rate Risk (IRR) Management.” While the financial landscape has evolved significantly since then, many of the supervisory expectations laid out in that advisory remain highly relevant—especially in light of recent developments at the Federal Reserve.
Key Takeaways from the 2010 Advisory
More than just a historical document, the advisory serves as a blueprint for how banks should approach interest rate risk across different market cycles. Its core message is timeless: measuring, monitoring, and controlling IRR isn’t a one-off exercise, but an ongoing discipline built on practices that remain just as relevant today as they were in 2010.
Here’s a Concise Look at what It Emphasized:
- Assessing not just short‐term profits (net interest margin) but also the economic value of assets and liabilities under changing rate scenarios.
- Running stress tests and scenario analyses to see how different interest rate paths—both gradual shifts and sudden shocks—would impact earnings, liquidity, and capital.
- Clear governance: senior management and boards must understand risk, set policies, monitor limits, and ensure internal audit or risk functions evaluate whether the framework is working.
- Mitigation tools: matching maturities, hedging where appropriate, adjusting durations, and being prepared for adverse environments.
- Transparency and documentation: assumptions, model inputs, scenario results should be well‐documented and shared with regulators.
What’s New: The Fed’s Recent Actions & Expectations
With this context in mind, the interest rate environment is once again entering a period of change. After holding rates steady, the Federal Reserve has begun to lower its policy rate, an important inflection point for interest rate risk management.
Understanding these moves and what they may signal for the months ahead is essential for banks seeking to align their ALM strategies with a shifting outlook:
- On September 17, 2025, the Fed cut its target range for the federal funds rate by 25 basis points, moving from 4.25-4.50% to 4.00-4.25%. This was its first rate cut since December 2024.
- The Fed also signaled two more rate cuts likely in the remainder of 2025.
- Labor market weakness was a key driver for this shift. While inflation remains above the Fed’s 2% target, there are signs that employment is softening, job gains are slowing, and there is concern that if the labor market dips more, it could negatively affect economic growth.
Why the 2010 Federal Advisory Is Particularly Relevant Now
Given these developments, the 2010 advisory is a timely guide for today’s risk managers, not only a historical reference. The Fed’s move to begin lowering rates, even with inflation still above target, underscores how quickly economic conditions can shift and how important it is for institutions to remain prepared for multiple scenarios.
This is a moment for banks to reassess assumptions, strengthen stress testing, and ensure governance frameworks are equipped to respond to rapid changes in the rate environment.
The following points highlight where the advisory’s principles are most relevant in the current context:
- Changing rate regimes means old risk models may be insufficient
If your institution’s stress tests assume a stable or rising-rate environment or only modest rate changes, you might be caught off guard. With rate cuts now underway, but inflation still elevated, the path is far from certain. Models must handle both easing and potential re-tightening or inflation shocks.
- Duration and Economic Value Risk
With cuts, bond yields will likely adjust, and the value of fixed income assets (especially long duration) could be volatile. Banks need to monitor how interest rate changes affect not just earnings but also the economic value of equity (EVE), capital, and market-risk positions.
- Governance & Monitoring Under Uncertainty
When the Fed signals more cuts, markets adjust expectations rapidly. Firms whose governance frameworks aren’t agile enough may see misalignments in metrics vs strategy. Boards and senior management need good visibility into sensitivity analyses, scenario outcomes, and what the downside looks like if inflation stays sticky or if rates don’t follow the expected path.
- Mitigation Strategy Is Not Just for Rising Rates
Many banks long focused on hedging against rate rises or curve steepening. Now, with expectations of cuts, institutions must think about risks from falling rates: reinvestment risk, margin compression on assets funded at higher rates, and liquidity implications. Hedging strategies and maturity mismatches can become risky in different ways.
- Transparency, Assumptions, and Stress Testing
The Fed’s recent decisions show how much hinges on labor market data, inflation expectations, and global developments. Institutions that document “what if inflation stays above target longer,” or “what if employment weakens more than forecast,” will be much better positioned when supervisors or investors ask tough questions.
What Professionals Should Do: Key Actions to Strengthen ALM Frameworks
In light of the current scenario, this is the ideal moment for ALM professionals to revisit their frameworks and take concrete steps to ensure they are ready for the next phase of the rate cycle.
Here are what firms specialized in ALM should be thinking about, and possibly implementing, to respond to this climate:
- Update scenario sets: Include paths with rate cuts, flat rates, and even unexpected increases (if inflation recedes slowly or exogenous shocks arise).
- Evaluate EVE sensitivity under multiple rate paths—not only “normalizations” but also easing cycles.
- Reassess liability repricing schedules: liabilities locked in at high rates may reduce costs only slowly; assets may see yield declines faster.
- Review hedging programs: Are they set up to handle falls as well as rises? Are there embedded options (prepayment, caps/floors) you need to model more precisely?
- Governance check: Make sure policy limits, stress test results, and downside risk metrics are reviewed regularly by management and the board. Make sure internal audits or independent risk oversight functions are active.
- Prepare for supervisory scrutiny: Given inflation remains elevated and economic signals mixed, regulators will likely zero in on how institutions are prepared for unfavorable surprises—e.g., inflation stubbornly above target, or rate cuts not unfolding as markets expect.
Looking Ahead: Turning Guidance into Strategy
The 2010 IRR advisory was never about a single rate cycle. It was, and remains, about building resilient risk management frameworks. With the Fed now cutting rates and the possibility of more adjustments ahead, institutions are entering a new phase of interest rate risk. The same fundamentals still apply: robust measurement, well-designed frameworks, strong governance, clear documentation, and preparation for multiple possible outcomes.
In today’s environment, those who treat interest rate risk as reactive will be caught off guard. Those who embed it as forward-looking, scenario-driven, and strategically managed will have a much better chance to preserve capital, stabilize margins, and navigate uncertainty.
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