FAQ: Interagency Advisory on Interest Rate Risk Management

The financial regulators have received several requests to clarify points in the 2010 interagency Advisory on Interest Rate Risk Management (the advisory). This “Frequently Asked Questions” document responds to the most common questions.

Overview

The advisory reiterates the need for sound management of interest rate risk (IRR) and highlights sound practices. Each of the financial regulators has published guidance on interest rate risk management (see the appendix). Although the specific guidance issued and the oversight and surveillance mechanisms used by the regulators may differ, supervisory expectations for sound IRR management are consistent. Ultimately, consistent with the agencies’ safety and soundness guidelines, financial institution management is responsible for  ensuring that the capabilities of the risk management process match the risks being taken. The regulators expect all institutions to manage IRR exposures using processes and systems commensurate with earnings and capital levels, complexity, business models, risk profiles, and the scope of operations.

One of the underlying principles of effective risk management is that the depth and capabilities of risk management processes should be sufficient for the complexity and magnitude of risks being taken. This document provides examples of risk management expectations for institutions of various risk profiles, and it includes direction on how to adjust processes as profiles change.  Each financial regulator, in the examination process, assesses whether an institution’s IRR measurement process is adequate for its complexity and risk profile.

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