Financial Institution Management of Interest Rate Risk
FIL-2-2010 January 20, 2010
Current economic conditions present significant risk management challenges to depository institutions of all sizes. Institutions are reminded to not lose focus on their management of interest rate risk (IRR). For a number of institutions, increased loan losses and sharp declines in the value of certain securities portfolios are placing downward pressure on capital and earnings. In this interest rate environment, taking advantage of a steeply upward sloping yield curve by funding longer term assets with shorter-term liabilities may pose risks to an institution's capital and earnings should short-term interest rates rise. Depository institutions are expected to manage IRR exposures using policies and procedures commensurate with their complexity, business model, risk profile, and scope of operations. This letter clarifies existing IRR guidance.
The board of directors and senior bank management are responsible
for the establishment, approval, implementation, oversight, and annual
review of IRR management strategies, policies, procedures, and limits
(or risk tolerances).
Analysis of an institution's exposure to IRR should include assessing
the likely effects of meaningful stress scenarios, including interest rate
shocks of at least 300 to 400 basis points
Capital and earnings should be sufficient to support an institution's IRR
If IRR measures approach or exceed risk limits, management should
take steps to limit or mitigate the exposure, for example, by hedging or
altering the balance sheet.
Financial institutions are expected to conduct independent reviews of
their IRR models and management processes. If third-party models
are used, management should obtain documentation of the results
from reviews conducted by the vendor.
FDIC-Supervised Banks (Commercial and Savings)