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Interest Rate Risk

After the collapse of Bear Stearns and Lehman Brothers in 2008, regulatory attention has focused on the dangers of not having diverse sources of liquidity and inadequate management of your institution’s exposure to interest rate risk (IRR).  Since 2008, the following new guidance relevant to management of an IRR program has been issued:

  • In January 2010, the FFIEC issued the Interagency Advisory on Interest Rate Risk Management, which clarified regulatory expectations for compliance with existing guidance.
  • In March 2010, the FFIEC issued the Interagency Policy Statement on Funding and Liquidity Risk Management.  This Statement specified regulatory expectations for a liquidity contingency funding plan and the testing of the plan.  Additionally, paragraph 42 of this Statement requires an independent party to “evaluate the various components of the institution’s liquidity risk management process.”
  • In January 2012, the FFIEC issued the Interagency Advisory on Interest Rate Risk Management Frequently Asked Questions.  Key items discussed include whether an institution should use a "no growth" scenario, whether the use of FDICIA decay rates remain appropriate for projecting IRR, how decay rates may be influenced by external factors during a period of economic stress and how often an institution should run scenarios that comprise the four components IRR - repricing mismatch, basis risk, yield curve risk and options risk.
  • In October 2013, the FDIC issued FIL 46-2013, Managing Sensitivity to Market Risk in a Challenging Interest Rate Environment.  This FIL outlines FDIC concerns about how rising interest rates may negatively impact net interest income and increase deposit run-off at institutions with a liablity-sensitive balance sheet position.  This FIL also reinforces previously issued guidance listed in the bullet points above.  

Scott - Riddle Consulting can perform an annual independent validation of the Bank’s IRR projection model as well as an annual independent evaluation of your liquidity contingency funding plan.  Included in this engagement is back-testing of previous IRR projections, comparison of IRR projections to the Bank’s budgeted projections, a test of the accuracy of the information presented in the third-party IRR report and a comparison of account balances in the applicable Call Report to the information presented in the third-party IRR report as of the same date.

We also test for compliance with various internal Policy provisions that have been established by the Bank.  Our engagement is structured to comply not only with provisions of the regulatory guidance issued since 2010 listed in the bullet points above, but also the 1996 Joint Agency Policy Statement on Interest Rate Risk that remains in force.