The foundation of an effective interest rate risk (IRR) management process is the establishment of board-approved policies that measure, monitor, and control IRR. As discussed in this article, a successful governance framework is grounded in an informed and involved board of directors that provides senior management with clear policy guidance, sufficient internal resources, and risk mitigation strategies to guide an institution’s IRR position well in advance of market shifts.
Effective IRR measurement and monitoring requires accurate information; therefore, bank management should develop assumptions that are readily understood, well supported, and updated periodically. This article describes the process for developing key assumptions necessary to analyze interest rate sensitivity in the current environment.
An annual independent review of its IRR measurement system is an important part of any bank’s internal control framework. The scope and formality of such a review should be appropriate for the size and complexity of the bank. This article describes commonsense approaches that non-complex institutions may use to effectively and economically perform an IRR independent review in-house.
This article is intended to help bankers prepare for regulatory reviews of IRR by describing what examiners focus on, supervisory expectations with respect to IRR, and communication with the FDIC during an examination. Resources for bankers regarding IRR also are provided.
This feature provides an overview of recently released regulations and other items of interest.
Supervisory Insights is published by the Division of Supervision and Consumer Protection of the Federal Deposit Insurance Corporation to promote sound principles and best practices for bank supervision.
Martin J. Gruenberg
Doreen R. Eberley
Director, Division of Risk Management Supervision
Journal Executive Board
Division of Risk Management
George E. French, Deputy Director and Executive Editor
James C. Watkins, Senior Deputy Director
Robert L. Burns, Deputy Director
Melinda West, Deputy Director
Division of Depositor and Consumer
Sylvia H. Plunkett, Senior Deputy Director
Jonathan N. Miller, Deputy Director
Michael J. Dean, Acting Regional Director, Atlanta Region
Kristie K. Elmquist, Dallas Region
Stan R. Ivie, San Francisco Region
James D. La Pierre, Kansas City Region
M. Anthony Lowe, Chicago Region
John F. Vogel, New York Region
Kim E. Lowry
Daniel P. Bergman
Jeffrey A. Fahrmann
Supervisory Insights is available online by visiting the FDIC’s website at www.fdic.gov. To provide comments or suggestions for future articles, to request permission to reprint individual articles, or to request print copies, send an e-mail to SupervisoryJournal@fdic.gov.
The views expressed in Supervisory Insights are those of the authors and do not necessarily reflect official positions of the Federal Deposit Insurance Corporation. In particular, articles should not be construed as definitive regulatory or supervisory guidance. Some of the information used in the preparation of this publication was obtained from publicly available sources that are considered reliable. However, the use of this information does not constitute an endorsement of its accuracy by the Federal Deposit Insurance Corporation.