INTEREST RATE RISK MANAGEMENT FREQUENTLY ASKED QUESTIONS

Since the release of SR letter 10-1, Interagency Advisory on Interest Rate Risk, examiners and the banking industry have sought clarification of some specific recommendations. 

Interest rate risk management continues to be of great concern to regulators and additional guidance is provided in the form of Frequently Asked Questions and Answers (FAQs) to better explain the interagency advisory on interest rate risk management.  The regulators have restated their expectations that all supervised institutions will manage interest rate risk exposures using processes and systems commensurate with their complexity, business models, risk profiles, scope of operations and earnings and capital levels and the FAQs provide examples of risk management expectations for financial institutions of various interest rate risk profiles, including how to adjust processes as risks change. 

Key topics covered by the FAQs include:

  • The appropriate use of vendor models for most institutions, and management's responsibility to ensure that any vendor model selected is appropriately sophisticated to capture the institution's risks - both on- and off-balance sheet.
    •  
  • The sufficiency of internal controls and audit procedures to ensure that model inputs, assumptions, and results are accurate and appropriately quantify interest rate risk exposures.
    •  
  • Measurement techniques that should be used to quantify the potential impact of market interest rate changes on both earnings and the economic value of capital based on prepayment and extension risks faced by an institution.  These risks have increased over the past 15 years for institutions of all sizes due to greater complexity of assets and liabilities.
    •  
  • When implementing model simulations, specific consideration should be given to:  (1) using interest rate shock scenarios that are immediate and significant; (2) contemplation of parallel and non-parallel yield curve changes; (3) using “no growth,” or stable balance sheet scenarios, throughout the simulation time horizon with growth scenarios contemplated only in addition to a stable balance sheet scenario; and, (4) ensuring non-maturity deposit assumptions in the model are consistent with the behavior of the institution’s deposits.

The Frequently Asked Questions may be accessed by going to www.fdic.gov and searching for "Interagency Advisory on Interest Rate Risk."  

Compliance Handbook Search

STAY CONNECTED

Nebraska Bankers Association

233 South 13th Street, Suite 700
Lincoln, NE 68508
​402-474-1555
​Digital Millennium Copyright Act Policy