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Financial Institution Letter

Financial Institution Management of Interest Rate Risk

January 20, 2010
Notes
 
Summary: 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.

Highlights:
  • 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 profile.
  • 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.

Distribution:
FDIC-Supervised Banks (Commercial and Savings)

Suggested Routing:
Chief Executive Officer
Chief Financial Officer
Chief Risk Officer

Referenced Guidance:
Joint Agency Policy Statement on Interest Rate Risk, FIL-52-96

Note:
FDIC financial institution letters (FILs) may be accessed from the FDIC's Web site at www.fdic.gov/news/financial-institution-letters/index.html

To receive FILs electronically, please visit http://www.fdic.gov/about/subscriptions/fil.html .

Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 3501 Fairfax Drive, E-1002, Arlington, VA 22226 (1-877-275-3342 or 703-562-2200).

FIL-2-2010
Attachment(s)
FDIC Press Release on IRR Advisory
FFIEC Press Release on IRR Advisory
FFIEC Advisory on Interest Rate Risk Management

Last Updated: January 20, 2010