In early January 2012, the financial regulators* responded to requests to clarify points from the 2010 Advisory on Interest Rate Risk Management (“IRR”), by issuing the Interagency Advisory on Interest Rate Risk Management Frequently Asked Questions (“FAQ”) .
The FAQs are focused on the need for financial institutions to establish IRR management practices that are commensurate with the institution’s size, complexity, and experience, and to continually assess whether their methods of monitoring and managing IRR adequately capture the associated risks.
FAQ’s addressed in the Interagency Advisory are as follows:
- How should financial institutions determine which IRR vendor models are appropriate?
- If an institution implements a new strategy and later finds its IRR measurement model cannot capture the risk exposure, could this raise significant supervisory concerns?
- What types of IRR measurement methodologies are institutions expected to use?
- Should institutions with non-complex balance sheets use earnings simulations to measure risk to earnings?
- Should institutions perform rate shocks greater than +/- 300 basis points?
- Should all institutions analyze risk other than repricing risk, such as non-parallel yield curves, basis risk, and options risk? If so, how often should risk analyses be run?
- Should institutions establish board-approved thresholds for monitoring each stress scenario they run?
- When no growth scenarios for measuring earnings simulations are mentioned, how is no growth defined?
- Most institutions use third-party tools to measure IRR. Can independent certifications/validations commissioned by model vendors satisfy supervisory expectations for model validations?
- Are examples of effective back-testing practices provided?
- Can institutions use industry estimates for non-maturity-deposit (NMD) decay rates?
- Regarding deposit decay rate assumptions, what are some examples of a “market environment in which customer behaviors may not reflect long-term economic fundamentals?”
*The Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the State Liaison Committee.
To discuss the impact of the FAQs on your financial institution, please contact the expert listed below at PYA , (800) 270-9629.