WASHINGTON The Federal Deposit Insurance Corp. is keeping up the drumbeat on the importance of managing interest rate risk.
The agency's semiannual journal on supervisory issues released Thursday lays out effective governance strategies for dealing with rate risk exposure, emphasizes the need for realistic interest rate assumptions and details what examiners look for in interest rate risk reviews. One article also describes how banks can conduct an "in-house" independent review of their risk management.
"Because independent reviews can be costly when performed by external parties, many community banks find it is more practical and economical to complete this function internally," senior examiner Syed Islam wrote in the winter issue of the FDIC's Supervisory Insights publication.
All four articles in the journal focus on interest rate risk, echoing concerns the bank regulators have expressed for years including in earlier issues of the FDIC publication about the historically low rate environment. On Wednesday, the Office of the Comptroller of the Currency cited banks' exposure to sudden rate hikes in a report about prevalent risks facing the industry.
The article in the FDIC journal dealing with governance recommended banks develop asset-liability management policies that "establish clear lines of authority and responsibility; define allowable products, services, and activities; and include risk mitigation strategies."
Meanwhile, the publication said using "unsupported or stale assumptions" about rate trends is a common pitfall in assessing interest rate risk.
"Using unrealistic or overly optimistic assumptions in IRR systems can result in an inaccurate picture of a bank's risk exposure, potentially resulting in flawed asset-liability management strategies," wrote examiner Ryan Thompson.
The final article was meant to inform bankers about what to expect from examiners' scrutiny of interest rate risk management policies. The publication said institutions should be ready to discuss with examiners the effectiveness of internal risk measurement systems, "as well as key strategies to mitigate these potential risks."
In addition to materials examiners will review during the process, the report said the risk assessment can also include "an initial discussion with bank management.
"We often begin by meeting with senior management to discuss their perspective on how the balance sheet is positioned, potential risks, and any current or potential mitigating strategies," wrote senior examination specialist Frank Hughes.
"In addition, a general discussion of balance sheet composition, deposit stability, new products, and any planned changes in strategic direction can be very informative. Finally, a high-level dialogue about the results of the institution's IRR measurement system and key assumptions can help facilitate the IRR review."