• Banks enter 2026 facing lower policy rates and a steeper Treasury curve, benefiting funding costs but pressuring margins

• Greater uncertainty around the Fed’s path elevates the importance of robust interest rate sensitivity analysis\

• Regulatory guidance on interest rate risk has lagged market practice and technological advances

• Disparate supervisory interpretations highlight the need for clearer, more consistent IRR guidance

• Advanced monitoring frameworks increasingly combine traditional market data with AI and alternative signals

• Leading firms are integrating interest rate and liquidity risk through cross-risk stress scenarios

• IRRBB practices are becoming more transparent and strategically embedded across treasury, FP&A, and capital planning

Ahead of CeFPro’s Treasury & ALM USA conference, we spoke with Sarah McAvoy, Former G-SIB and Regional Bank Treasurer. This interview explores how banks are navigating interest rate uncertainty, evolving regulatory expectations, and increasingly complex balance sheets.

With continued uncertainty around the path of U.S. policy rates, how are banks thinking about adjusting business strategies to balance near-term earnings with longer-term capital and interest rate risk exposures?

Banks are coming into 2026 with a lower US policy rate environment and a steeper Treasury curve than they experienced over the last couple of years, benefitting deposit costs and reinvestment opportunities but potentially pressuring net interest margins.  With the Federal Reserve pausing in January after the rate cuts of 2025, the expectation is that they will proceed cautiously, mindful about residual inflation concerns.  With less certainty about the timing and path of US policy rates from here, interest rate risk sensitivity analysis will be critical for banks to implement, ensuring business strategies can weather a range of outcomes.

Interest rate risk modelling techniques have advanced, but regulatory guidance has not always evolved at the same pace. Where could updated guidance improve forecasting, sensitivity analysis, or stress testing practices the most?

While US regulators have propagated numerous liquidity and capital risk management rules in recent years, the evolution of regulatory guidance in the interest rate risk management space has been comparatively lacking, despite the learnings from the March 2023 events. Further, and perhaps as an outcome, regulators have tended to use their own discretion in assessing the interest rate risk management practices of banks resulting in disparate approaches. Other than some pockets of regulatory action (such as the Market Risk Capital Rule), the Interagency Advisory on Interest Rate Risk or “SR 10-1” from January 2010 remains the prevailing guidance leading some to call for updates including more prescriptive interest rate risk management requirements including quantitative limits. 

Consistent guidance around such topics as the use of models, the frequency and design of sensitivity analysis, disclosure requirements, and forward views of the impact of interest rate changes have not kept up with either market practice, technology, or the approaches for other risk sleeves.  Addressing those topics alongside potential quantitative rules would bring clarity and improve systemic risk. Additionally, recent trends toward limiting discretion or interpretation on the part of regulators during reviews and exams will further level the playing field and allow banks to focus on the most material risks they face.

Interest rates are increasingly influenced by a complex mix of inflation dynamics, government debt, politics, and labor market conditions. How should banks strengthen their monitoring frameworks to better capture these interactions?

Banks have long managed the impact of interest rate volatility on their business and balance sheets. The most successful have incorporated traditional market surveillance with more sophisticated social media monitoring, internal data mining, and application of AI techniques to track and analyze emerging trends and risks.  The March Treasury and ALM conference will provide an excellent opportunity to share best practices.

Looking ahead, how do you expect the coordination between interest rate risk and liquidity risk management to change, particularly as banks prepare for more volatile stress scenarios?

Interest rate, liquidity, operational, and even capital risk management have traditionally been rather separate disciplines both in regulatory frameworks and oversight, as well as in bank treasuries’ approaches to analysis, management, and staffing particularly at larger banks.  Certainly some of this distinct treatment is appropriate as it is important to understand the discrete risks, ask different questions, and assess specific parts of the business.  Additionally, regulators’ intense focus on governance, model documentation, and stringent processes discouraged on-the-fly or one-off scenarios because they lacked rigor without appreciating the insights that such exercises can provide. 

However, best-in-class firms are now finding ways to connect these risk assessments whether that be incorporating “cross risk” assessments into processes like CCAR, ILST, or Resolution or whether that be implementing “what if” scenarios with simultaneous shocks across risk types. We will be exploring these trends and discussing latest techniques at the March conference.

As balance sheets become more complex and rate volatility persists, how do you see IRRBB practices evolving over the next few years to remain both effective and strategically relevant?

Banks’ interest rate risk management protocols have historically been cloaked in mystery, usually the purview of a small group in Finance and Risk with direct report outs to senior leadership and the Board. With the host of acronyms (ALM, IRRBB, EVE, etc.) few people recognize outside of Treasury, as well as legitimate “need to know” protocols, the true risk and opportunity of interest rate volatility on a bank’s performance is not often widely understood by business heads or line managers.  With the confluence of increased competition, wider information transparency, and the lessons of March 2023 about getting interest rate risk management right, banks should enhance IRRBB practices to incorporate interest rate risk sensitivity in other processes such as Funds Transfer Pricing (FTP), FP&A forecasting, liquidity and capital stress testing, and Resolution planning to ensure the work remains strategically relevant and effective.