Last week, the Federal Financial Institutions Examination Council (FFIEC) released answers to Frequently Asked Questions (FAQs) about the January 2010 advisory on Interest Rate Risk Management. These FAQs are being adopted by the various banking regulators, including the National Credit Union Administration (NCUA) and State Liaison Committee. The FAQs respond to common questions on several areas that are critical to sound interest rate risk management, including appropriate measurement and reporting, robust and meaningful stress testing, assumption development reflecting the institution’s experience, and comprehensive model validation.
Banking regulators expect 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. Each financial institution’s management team is responsible for ensuring that the institution’s interest rate risk management processes and measurement systems are capable of capturing, reporting and controlling risks being taken. 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. The FAQs supplement the advisory and should be reviewed in connection with that document and other referenced guidance.