The Office of the Comptroller of the Currency on Wednesday updated the way it examines national banks for interest rate risk.
"Looking at interest rate risk has become a much more complex issue," Scott Calhoun, the OCC's deputy comptroller for risk evaluation, said in an interview. "We've upgraded the quality of the approach our examiners follow to supervise this risk."
The new exam procedures take into account the complex new products that are sensitive to changes in interest rates. For example, the guidelines instruct examiners to analyze whether a bank's portfolio contains derivative products whose rates significantly lag market interest rates.
The OCC stressed that no new requirements would be imposed on banks under the new exams. Rather, examiners are to check the strength of a bank's interest rate risk management and the level of its exposure. Examiners then are to judge the adequacy of a bank's capital relative to the exposure and its risk management processes.
In addition, examiners will ensure that bank management:
Understands the bank's on- and off-balance-sheet position.
Makes sure reports on interest rate risk furnished to the board are understandable.
Periodically validates the institution's interest rate risk management process.
Understands the sensitivity of fee-related income and expenses to interest rate swings.
Understands nonmaturity products, such as demand deposits and NOW accounts.
Mr. Calhoun said the new guidelines were needed to guard against future problems.
"While the current risk levels don't pose serious threats to the industry," he said, "there is a lot of uncertainty about the potential volatility in interest rates."
The new guidelines will help bankers prepare for unexpected swings in interest rates, Mr. Calhoun said.
The other banking agencies have also updated their interest rate exam procedures. In December, Federal Deposit Insurance Corp. examiners began using procedures that range from simple to complex depending on a bank's internal controls and the amount of interest rate risk it faces. The Fed updated its examination manual in November.