Regulator’s FAQ on Interest Rate Risk
Originally published 1/17/2012 © 2021 Olson Research Associates, Inc.
Last week the FFIEC released this FAQ for the 2010 Interagency Advisory on IRR. It’s a decent document that covers some important questions that I know clients and potential clients have had. However, it’s by no means a comprehensive document. I’ve developed a series of posts that comments on each of the questions for the benefit of our current and future A/L BENCHMARKS clients. Have they made things clearer? Can you expect anything different during your next exam based on this document? Let’s look at each question in detail (one per week starting 01/19/2012):
Measurement and Monitoring of IRR
5) Should institutions perform rate shocks greater than +/-300 basis points?
7) Should institutions establish board-approved thresholds for monitoring each stress scenario they run?
Internal controls and Validation
9) Most institutions use third party tools to measure IRR. Can independent certifications/validations commissioned by model vendors satisfy supervisory expectations for model validations?
10) Can you provide some examples of effective back-testing practices?
11) Can an institution use industry estimates for non-maturity-deposit (NMD) decay rates?
12) Regarding deposit decay-rate assumptions, what are some examples of a “market environment in which customer behaviors may not reflect long-term economic fundamentals?”