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ADVISORY ON INTEREST RATE RISK MANAGEMENT J a n u a r y 6, 2 0 1 0 T h e financial regulators1 are issuing this advisory to remind institutions of supervisory expectations regarding sound practices for m a n a g i n g interest rate risk (IRR). [Footnote 1. The financial regulators consist of the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the Federal Financial Institutions Examination Council (FFIEC) State Liaison Committee (collectively, the regulators). End footnote 1.] I n t h e c u r r e n t e n v i r o n m e n t o f h i s t o r i c a l l y l o w s h o r t - t e r m i n t e r e s t rates, it is i m p o r t a n t f o r institutions to have robust processes for measuring and, w h e r e necessary, mitigating their e x p o s u r e to potential increases in interest rates. Current financial market and e c o n o m i c conditions present significant risk m a n a g e m e n t c h a l l e n g e s t o i n s t i t u t i o n s o f all s i z e s . F o r a n u m b e r o f i n s t i t u t i o n s , increased loan losses and sharp declines in the values of s o m e securities portfolios are placing d o w n w a r d pressure on capital and earnings. In this challenging environment, f u n d i n g longer-term assets w i t h shorter-term liabilities can generate earnings, but also poses risks to an institution's capital and earnings. T h e r e g u l a t o r s r e c o g n i z e that s o m e d e g r e e of I R R is i n h e r e n t in t h e b u s i n e s s of banking. A t the same time, however, institutions2 are expected to have sound risk m a n a g e m e n t practices in place to measure, monitor, and control I R R exposures. [Footnote 2. Unless otherwise indicated, this advisory uses the term "financial institutions" or "institutions" to include banks, saving associations, industrial loan companies, federal savings banks, and federally insured natural person credit unions. End footnote 2.] A c c o r d i n g l y , each of the financial regulators h a v e established g u i d a n c e on the topic of I R R m a n a g e m e n t (see Appendix A). Although the specific guidance issued and the oversight and surveillance m e c h a n i s m s used by the regulators m a y differ, supervisory expectations for sound I R R m a n a g e m e n t are broadly consistent. The regulators expect all i n s t i t u t i o n s t o m a n a g e t h e i r I R R e x p o s u r e s u s i n g p r o c e s s e s a n d s y s t e m s c o m m e n s u r a t e with their earnings and capital levels, complexity, business model, risk profile, and scope of operations.3 [Footnote 3. In accordance with TB-13a, non-complex institutions with assets less than $1 billion regulated by the OTS may continue to rely on the NPV model to measure exposure to interest rate risk, unless otherwise directed by their OTS Regional Director. End footnote 3.] Effective I R R m a n a g e m e n t processes are particularly important for those institutions experiencing d o w n w a r d pressure on earnings and capital d u e to l o w e r credit quality and m a r k e t illiquidity. This advisory r e - e m p h a s i z e s the i m p o r t a n c e of effective corporate g o v e r n a n c e , policies and procedures, risk m e a s u r i n g and monitoring systems, stress testing, and internal controls related to the I R R exposures of institutions. It a l s o clarifies v a r i o u s e l e m e n t s of existing g u i d a n c e and describes selected I R R m a n a g e m e n t t e c h n i q u e s u s e d by effective risk managers. M o r e detailed guidelines on the basic principles of I R R m a n a g e m e n t discussed in this advisory can b e f o u n d in each regulator's established guidance.4 [Footnote 4. The principles set forth in this advisory and the regulators' individual guidance are consistent with the principles established by the Basel Committee on Banking Supervision. End footnote 4.] I m p o r t a n t l y , e f f e c t i v e IRR m a n a g e m e n t n o t o n l y i n v o l v e s t h e i d e n t i f i c a t i o n a n d m e a s u r e m e n t of I R R , b u t also p r o v i d e s f o r appropriate actions to control this risk. If a n i n s t i t u t i o n d e t e r m i n e s t h a t its c o r e e a r n i n g s a n d capital are i n s u f f i c i e n t t o s u p p o r t its l e v e l o f I R R , it s h o u l d t a k e s t e p s t o m i t i g a t e its e x p o s u r e , i n c r e a s e its c a p i t a l , o r b o t h . Corporate Governance Existing interagency and international g u i d a n c e identifies the board of directors as having the ultimate responsibility for the risks undertaken by an institution IRR. including A s a result, the regulators r e m i n d b o a r d s of directors that they should u n d e r s t a n d and be regularly informed about the level and trend of their institutions' I R R exposure. T h e b o a r d o f directors or its d e l e g a t e d c o m m i t t e e o f b o a r d m e m b e r s s h o u l d o v e r s e e t h e establishment, approval, implementation, and annual review of I R R strategies, policies, procedures, and limits (or risk tolerances). management Institutions should understand the implications of the I R R strategies they pursue, including their potential i m p a c t on market, liquidity, credit, a n d operating risks. S e n i o r m a n a g e m e n t is r e s p o n s i b l e f o r e n s u r i n g that b o a r d - a p p r o v e d strategies, policies, and procedures for m a n a g i n g I R R are appropriately executed within the designated lines of authority and responsibility. M a n a g e m e n t also is r e s p o n s i b l e f o r maintaining: • Appropriate policies, procedures and internal controls addressing I R R m a n a g e m e n t , including limits and controls over risk taking to stay w i t h i n b o a r d - a p p r o v e d tolerances; • Comprehensive systems and standards for measuring IRR, valuing positions, and assessing performance, including procedures for updating I R R measurement scenarios and key underlying assumptions driving the institution's I R R analysis; • Sufficiently detailed reporting processes to inform senior m a n a g e m e n t and the board of the level of I R R exposure. A n institution's I R R tolerance should b e c o m m u n i c a t e d so that the board of directors and senior m a n a g e m e n t clearly understand the institution's risk tolerance limits and approach to m a n a g i n g the impact of I R R on earnings and capital adequacy. IRR reports distributed to senior m a n a g e m e n t and the board should provide aggregate i n f o r m a t i o n a n d s u p p o r t i n g detail that is s u f f i c i e n t t o e n a b l e t h e m t o assess t h e sensitivity of the institution to changes in m a r k e t rates and important a s s u m p t i o n s underlying the metrics used. Institutions with an Asset/Liability C o m m i t t e e ( A L C O ) , or similar senior m a n a g e m e n t committee, should ensure the committee actively monitors the I R R profile and has sufficiently broad representation across m a j o r functions that can directly or indirectly i n f l u e n c e t h e institution's I R R e x p o s u r e (e.g., l e n d i n g , i n v e s t m e n t securities, w h o l e s a l e a n d retail f u n d i n g ) . Policies and Procedures Institutions are expected to h a v e c o m p r e h e n s i v e policies and procedures g o v e r n i n g all a s p e c t s o f t h e i r I R R m a n a g e m e n t p r o c e s s . Such policies and procedures should ensure the I R R implications of significant n e w strategies, products and businesses are integrated into I R R m a n a g e m e n t process. Policies and procedures also should d o c u m e n t and provide for controls over permissible hedging strategies and hedging instruments. Institutions s h o u l d e n s u r e t h e a s s e s s m e n t of I R R is a p p r o p r i a t e l y i n c o r p o r a t e d in f i r m - w i d e risk m a n a g e m e n t efforts so that t h e interrelationships b e t w e e n I R R and other risks are understood. I R R tolerances articulated in an institution's policies should b e explicit and address the potential i m p a c t of c h a n g i n g interest rates on earnings and capital f r o m a short-term and a long-term perspective. W e l l - m a n a g e d institutions generally specify I R R tolerances in the context of scenarios of potential c h a n g e s in m a r k e t interest rates and a target or range for performance metrics. Institutions with significant exposures to basis risk, yield curve risk or positions w i t h explicit or e m b e d d e d options should establish risk tolerances appropriate for these risks. M e a s u r e m e n t a n d M o n i t o r i n g of I R R Existing interagency guidance articulates supervisors' expectations that institutions have robust I R R m e a s u r e m e n t processes and systems to assess exposures relative to established risk tolerances. S u c h systems should b e c o m m e n s u r a t e with the size and complexity of the institution. A l t h o u g h institutions m a y rely on third-party I R R models, they are expected to fully understand the underlying analytics, assumptions, and m e t h o d o l o g i e s and ensure such systems and processes are incorporated appropriately in the strategic (long-term) and tactical (short-term) m a n a g e m e n t of I R R Measurement exposures. Methodologies Institutions use a variety of techniques to measure I R R exposure. The regulators continue to believe that w e l l - m a n a g e d institutions will consider earnings and e c o n o m i c perspectives w h e n assessing the scope of their I R R exposure. R e d u c e d earnings or outright losses adversely affect an institution's liquidity and capital adequacy. Evaluating t h e i m p a c t o f a d v e r s e c h a n g e s i n a n i n s t i t u t i o n ' s e c o n o m i c v a l u e a l s o is u s e f u l a s it c a n signal future earnings and capital problems.5 [Footnote 5. 12 CFR § 3.10 provides that national banks can be assessed higher minimum capital ratios based on significant exposures to declines in the economic value of its capital. End footnote 5.] A l t h o u g h simple maturity g a p analysis for assessing the i m p a c t of c h a n g e s in m a r k e t rates on earnings m a y continue to b e a viable analytical tool for small institutions w i t h less c o m p l e x I R R profiles, m a n y institutions n o w u s e s o m e f o r m of simulation modeling to measure I R R exposure. In fact, current c o m p u t e r technology allows even s o m e smaller, less sophisticated institutions to p e r f o r m c o m p r e h e n s i v e simulations of the potential i m p a c t of changes in m a r k e t rates on their earnings and capital. Most institutions primarily use simulations to assess the impact of changing rates on earnings. However, m a n y simulation models have the capability of forecasting the impacts on both earnings and capital b y generating p r o - f o r m a i n c o m e statements and balance sheets. M o s t also have capabilities for assessing the impact of changing rates on the market value of the balance sheet. Institutions are encouraged to u s e the full c o m p l e m e n t of analytical capabilities of their I R R simulation models. A key aspect of I R R simulation involves the selection of an appropriate time horizon(s) over which to assess I R R exposures. Simulations can be performed over any time horizon and often are used to analyze multiple horizons identifying short-term, intermediate-term, and long-term risk. W h e n u s i n g earnings simulation models, IRR e x p o s u r e s are b e s t p r o j e c t e d o v e r at least a t w o - y e a r period. U s i n g a t w o - y e a r t i m e f r a m e will better capture the true i m p a c t of important transactions, tactics, and strategies taken to increase revenues which can be hidden by viewing projected results within shorter time horizons. H o w e v e r , to fully assess the impacts of certain products with embedded options, longer time horizons of five to seven years are typically needed. In general, simulation m o d e l s can b e either static or d y n a m i c . Static simulation models are based on current exposures and assume a constant balance sheet with no n e w growth. In contrast, d y n a m i c simulation m o d e l s rely on detailed a s s u m p t i o n s regarding c h a n g e s in existing business lines, n e w business, a n d c h a n g e s in m a n a g e m e n t customer behavior. and Both techniques are capable of incorporating assumptions about the future path of interest rates using simple deterministic scenario analysis, m o r e sophisticated stochastic-path techniques, or M o n t e Carlo simulations. D y n a m i c earnings simulation models can be useful for business planning and budgeting purposes. H o w e v e r , d y n a m i c s i m u l a t i o n is h i g h l y d e p e n d e n t o n k e y v a r i a b l e s and assumptions that are extremely difficult to project with accuracy over an extended period. Furthermore, model assumptions can potentially hide certain key underlying risk exposures. A s such, w h e n performing d y n a m i c simulations, institutions should also run static simulations to p r o v i d e A L C O or senior m a n a g e m e n t a c o m p l e t e a n d c o m p a r a t i v e description of the institution's I R R exposure. D e s p i t e their m a n y benefits, b o t h static a n d d y n a m i c earnings simulations h a v e limitations in quantifying I R R exposure. A s a result, e c o n o m i c v a l u e m e t h o d o l o g i e s should also be used to broaden the assessment of I R R exposure.6 [Footnote 6. The FDIC, FRB, and OCC commonly refer to such methodologies as Economic Value of Equity (EVE) models. The NCUA uses the term Net Economic Value (NEV) in its regulations and guidance, and the OTS uses Net Portfolio Value (NPV). End footnote 6.] Economic value-based methodologies measure the degree to w h i c h the economic values of an institution's positions change under different interest rate scenarios. The economic-value approach f o c u s e s o n a l o n g e r - t e r m t i m e h o r i z o n , c a p t u r e s all f u t u r e c a s h f l o w s e x p e c t e d f r o m existing assets a n d liabilities, a n d is m o r e e f f e c t i v e in c o n s i d e r i n g e m b e d d e d o p t i o n s in a typical institution's portfolio. In general, m o s t e c o n o m i c v a l u e m o d e l s u s e a static a p p r o a c h in that the analysis typically does not incorporate n e w business; rather, the analysis s h o w s a snapshot in time of the risk inherent in the portfolio or b a l a n c e sheet. However, some institutions have started to incorporate d y n a m i c m o d e l i n g techniques that provide forward-looking estimates of economic value. Institutions are e n c o u r a g e d to u s e a variety of m e a s u r e m e n t m e t h o d s to assess their I R R profile. Regardless of the m e t h o d s used, an institution's I R R measurement s y s t e m s h o u l d b e s u f f i c i e n t l y r o b u s t t o c a p t u r e all m a t e r i a l o n a n d o f f - b a l a n c e s h e e t positions and incorporate a stress-testing process to identify and quantify the institution's I R R exposure and potential p r o b l e m areas. Stress Testing T h e regulators r e m i n d institutions that stress testing, w h i c h includes both scenario a n d sensitivity analysis, is an integral c o m p o n e n t of I R R m a n a g e m e n t . In general, scenario analysis uses the model to predict a possible future o u t c o m e given an event or series of events, while sensitivity analysis tests a m o d e l ' s parameters without relating those c h a n g e s to an u n d e r l y i n g event or real w o r l d o u t c o m e . 7 [Footnote 7. Basel Committee on Banking Supervision, Principles for Sound Stress Testing Practices and Supervision. May 2009. End footnote 7.] W h e n c o n d u c t i n g scenario analyses, institutions should assess a r a n g e of alternative future interest rate scenarios in evaluating I R R exposure. This range should b e sufficiently m e a n i n g f u l to fully identify basis risk, yield c u r v e risk a n d the risks of e m b e d d e d options. In m a n y cases, static interest rate shocks consisting of parallel shifts in the yield curve of plus and m i n u s 2 0 0 basis points m a y not b e sufficient to adequately assess an institution's I R R exposure. A s a result, institutions should regularly assess I R R e x p o s u r e s b e y o n d typical industry conventions, including c h a n g e s in rates of greater m a g n i t u d e (e.g., u p a n d d o w n 3 0 0 a n d 4 0 0 basis p o i n t s ) across d i f f e r e n t t e n o r s t o reflect changing slopes and twists of the yield curve. Institutions should ensure their scenarios are severe but plausible in light of the existing level of rates and the interest rate cycle. F o r example, in low-rate environments, scenarios involving significant declines in m a r k e t rates can b e d e e m p h a s i z e d in f a v o r of increasing the n u m b e r a n d size of alternative rising-rate scenarios. D e p e n d i n g on an institution's I R R profile, stress scenarios should include but not b e limited to: • Instantaneous and significant changes in the level of interest rates (instantaneous rate shocks); • Substantial c h a n g e s in rates over time (prolonged rate shocks); • C h a n g e s in t h e r e l a t i o n s h i p s b e t w e e n k e y m a r k e t r a t e s (i.e., b a s i s risk); a n d • C h a n g e s in t h e s l o p e a n d t h e s h a p e o f t h e y i e l d c u r v e (i.e., y i e l d c u r v e risk). T h e r e g u l a t o r s r e c o g n i z e t h a t n o t all f i n a n c i a l i n s t i t u t i o n s w i l l r e q u i r e t h e full range of the scenarios discussed above. N o n - c o m p l e x institutions (e.g., institutions w i t h limited e m b e d d e d options or structured products on their balance sheet) m a y b e able to justify running f e w e r or less intricate scenarios, depending on their I R R profile. H o w e v e r , interest rate shocks of sufficient magnitude should be run, regardless of the institution's size or complexity. Institutions should ensure I R R exposures are incorporated and evaluated as part of the enterprise-wide risk identification and analysis process. In addition to scenario analysis, stress testing should include a sensitivity analysis to help determine w h i c h assumptions have the most influence on model output. Institutions will generally f o c u s m o r e of their efforts in verifying the m o s t influential assumptions. Additionally, sensitivity analysis can b e used to determine the conditions under w h i c h key business assumptions and model parameters break d o w n or w h e n IRR m a y be exacerbated by other risks or earnings pressures. A t w e l l - m a n a g e d institutions, m a n a g e m e n t c o m p a r e s stress test results against a p p r o v e d tolerances limits. Such reviews enable institutions to properly estimate and monitor key variables w h o s e volatility will significantly affect I R R exposure. Moreover, in c o n d u c t i n g stress tests, special consideration should b e g i v e n to i n s t r u m e n t s or m a r k e t s in w h i c h concentrations exist as such positions m a y b e m o r e difficult to u n w i n d or h e d g e d u r i n g periods of m a r k e t stress. Assumptions Proper measurement of I R R requires regularly assessing the reasonableness of assumptions that underlie an institution's I R R exposure estimates. The regulators remind institutions to d o c u m e n t , monitor, and regularly u p d a t e key a s s u m p t i o n s used in I R R measurement models. At a m i n i m u m , institutions should ensure the reasonableness of asset p r e p a y m e n t s , non-maturity deposit price sensitivity a n d decay rates, and k e y rate drivers for each interest rate shock scenario. Assumptions about non-maturity deposits are critical, particularly in m a r k e t e n v i r o n m e n t s in w h i c h c u s t o m e r b e h a v i o r s m a y n o t reflect long-term e c o n o m i c f u n d a m e n t a l s , or in w h i c h institutions are subject to heightened competition for such deposits. Generally, rate-sensitive and higher-cost deposits, such as brokered and Internet deposits, w o u l d reflect higher decay rates than other types of deposits. Also, institutions experiencing or projecting capital levels that trigger brokered and high interest rate deposit restrictions should adjust deposit assumptions accordingly.8 [Footnote 8. Section 38 of the FDI Act (12 U.S.C. 1831o) requires insured depository institutions that are undercapitalized to receive approval before engaging in certain activities, and further restricts interest rates paid on deposits by institutions that are not well capitalized. Section 38 restricts or prohibits certain activities and requires an insured depository institution to submit a capital restoration plan when it becomes undercapitalized. Section 216 of the Federal Credit Union Act and NCUA Rules and Regulations (12 CFR Part 702) establish the requirements and restrictions for federally insured credit unions under Prompt Corrective Action. For public unit and nonmember deposits, additional restrictions apply to federal credit unions as given in § 701.32 of the NCUA Rules and Regulations (12 CFR § 701.32). End footnote 8.] W h e n d y n a m i c simulations of future g r o w t h and business a s s u m p t i o n s are used, a s s e s s m e n t of c o n s i s t e n t r e p l a c e m e n t g r o w t h rate a s s u m p t i o n s is particularly i m p o r t a n t . C u s t o m e r behaviors can differ in various markets. Financial institutions should p e r f o r m historical and forward-looking analyses to develop supportable assumptions and m o d e l s relevant to their market and business plans. P r o p e r m e a s u r e m e n t of I R R also requires sensitivity testing of k e y that exert the greatest i m p a c t o n m e a s u r e m e n t results. assumptions W h e n actual experience differs significantly f r o m past a s s u m p t i o n s and expectations, institutions should u s e a r a n g e of assumptions to appropriately reflect this uncertainty. W h e n assumptions are adjusted f r o m prior reporting periods, the changes and their effects on model outputs should be d o c u m e n t e d and clearly identified. Risk Mitigating Steps L i m i t controls should b e in place to ensure positions that exceed certain predetermined levels receive p r o m p t m a n a g e m e n t attention. A n appropriate limit system should p e r m i t m a n a g e m e n t to identify I R R exposures, initiate discussions a b o u t risk, a n d take appropriate action as identified in I R R policies and procedures. Further, a well- m a n a g e d institution will find a balance b e t w e e n establishing limits that are neither so h i g h t h a t t h e y are n e v e r b r e a c h e d n o r so l o w that e x c e e d i n g t h e limits is c o n s i d e r e d routine and not worthy of action. Should I R R e x p o s u r e exceed or approach these limits, institutions can mitigate their risk through balance sheet alteration and hedging. The most c o m m o n w a y to control I R R is t h r o u g h t h e b a l a n c e sheet m i x of assets a n d liabilities. This involves achieving an appropriate distribution of asset maturities or repricing structures, w i t h the maturity or repricing m i x of liabilities that will avoid the potential for severe maturity or duration m i s m a t c h e s b e t w e e n assets and liabilities. Using derivative instruments to mitigate IRR exposures m a y be appropriate for institutions with the k n o w l e d g e and expertise in these instruments. H e d g i n g with interest rate derivatives is a potentially c o m p l e x activity that c a n h a v e u n i n t e n d e d i n c l u d i n g c o m p o u n d i n g losses, if u s e d i n c o r r e c t l y . consequences, 9 [Footnote 9. Federal credit unions may only enter into derivative transactions upon receiving prior approval from the NCUA. End footnote 9.] E a c h institution using derivatives should establish an effective process f o r m a n a g i n g interest rate risk. T h e level of structure and formality in this process should b e c o m m e n s u r a t e w i t h the activities and level of risk approved by senior m a n a g e m e n t and the board. Institutions should not undertake this activity unless the board and senior m a n a g e m e n t understand the institution's hedging strategy w h e n u s i n g these instruments, including the potential risks and benefits of the strategy. Reliance on outside consultants to assist in the establishment of such a strategy does not absolve the board and senior management of their responsibility to fully understand the risks of the derivatives hedging strategy. Hedging strategies should be designed to limit downside earnings exposure or manage income or economic value of equity (EVE) volatility. Internal Controls and Validation The regulators expect institutions to have an adequate system of internal controls to ensure the integrity of all elements of their IRR management process, including the adequacy of corporate governance, compliance with policies and procedures, and the comprehensiveness of IRR measurement and management information systems. These controls should be an integral part of the institution's overall system of internal controls and should promote effective and efficient operations, reliable financial and regulatory reporting, and compliance with relevant laws, regulations, and institution policies. Model Validation Validating IRR models is a fundamental part of any institution's system of internal controls. An important element of model validation is independent review of the logical and conceptual soundness. The scope of the independent review should involve assessing the institution's measurement of IRR, including the reasonableness of assumptions, the process used in determining assumptions, and the backtesting of assumptions and results. Management also should implement adequate follow-up procedures to monitor management's corrective actions. The results of these reviews should be available for the relevant supervisory authorities. Smaller institutions that do not have the resources to staff an independent review function should have processes in place to ensure the integrity of the various elements of their IRR management processes. Often, smaller institutions will use an internal party that is sufficiently removed from the primary IRR functions or an external auditor to ensure the integrity of their risk management process. Institutions that use vendor-supplied models are not required to test the mechanics and mathematics of the measurement model. However, the vendor should provide documentation showing a credible independent third party has performed such a function. 10 [Footnote 10. Ibid. End footnote 10.] Large and complex institutions, or those with significant IRR exposures, may need to perform more in-depth validation procedures of the underlying mathematics. Validation practices could include constructing an identical model to test assumptions and outcomes or using an existing, well-validated "benchmark" model, which is often a less costly alternative. The benchmark model should have theoretical underpinnings, methodologies, and inputs that are as close as possible to those used in the model being validated. Large and more complex institutions have used "benchmarking" effectively to identify model errors that could distort IRR measurements. The depth and extent of the validation process should be consistent with the materiality and complexity of the risk being managed. Conclusion The adequacy and effectiveness of an institution's IRR management process and the level of its IRR exposure are critical factors in the regulators' evaluation of an institution's sensitivity to changes in interest rates and capital adequacy. When evaluating the applicability of specific guidelines provided in this advisory and the level of capital needed for the level of IRR, the institution's management and regulators should consider factors, such as the size of the institution, the nature and complexity of its activities, and the adequacy of its level of capital and earnings in relation to its overall IRR profile. Material weaknesses in risk management processes or high levels of IRR exposure relative to capital will require corrective action. Such actions could include recommendations or directives to: • • • • • Raise additional capital; Reduce levels of IRR exposure; Strengthen IRR management expertise; Improve IRR management information and measurement systems; or Take other measures or some combination of actions, depending on the facts and circumstances of the individual institution. IRR management should be an integral component of an institution's risk management infrastructure. Management should assess the need to strengthen existing IRR practices by incorporating the supervisory expectations and management techniques highlighted in this advisory. APPENDIX A REGULATORY GUIDANCE ON INTEREST RATE RISK Federal Deposit Insurance Corporation, Federal Reserve Board and Office of the Comptroller of the Currency: Interagency Policy Statement on Interest Rate Risk http://www.fdic.gov/news/news/financial/1996/fil9652.pdf Additional Federal Deposit Insurance Corporation: Risk Management Manual of Examination Policies (section 7.1) http://www.fdic.gov/regulations/safety/manual/section7-1_toc.html Additional Federal Reserve Board : Commercial Bank Examination Manual (section 4090) http://www.federalreserve.gov/boarddocs/supmanual/cbem/200910/4000.pdf Bank Holding Company Supervision Manual (section 2127) http://www.federalreserve.gov/boarddocs/supmanual/bhc/200907/2000p5.pdf Trading and Capital Markets Activities Manual (section 3010) http://www.federalreserve.gov/boarddocs/supmanual/trading/200901/3000p2.pdf Additional Office of the Comptroller of the Currency: Comptroller's Handbook on Interest Rate Risk http://www.occ.treas.gov/handbook/irr.pdf Model Validation (Bulletin 2000-16) http://www.occ.treas.gov/ftp/bulletin/2000-16.doc Risk Management of Financial Derivatives http://www.occ.treas.gov/handbook/deriv.pdf Office of Thrift Supervision: Management of Interest Rate Risk; Investment Securities and Derivatives (TB-13a) http://files.ots.treas.gov/84074.pdf Risk Management Practices in the Current Interest Rate Environment http://files.ots.treas.gov/25195.pdf Activities National Credit Union Administration: Real Estate Lending and Balance sheet Management (99-CU-12) Asset Liability Management Procedures (00-CU-10) Liability Management - Rate-Sensitive and Volatile Funding Sources (01-CU-08) Managing Share Inflows in Uncertain Times (01-CU-19) Non-maturity Shares and Balance Sheet Risk (03-CU-11) Real Estate Concentrations and Interest Rate Risk Management for Credit Unions with Large Positions in Fixed Rate Mortgages (03-CU-15) http://www.ncua.gov/Resources/LettersCreditUnion.aspx Basel Committee on Banking Supervision: Principles for the Management of Interest Rate Risk http://www.bis.org/publ/bcbs108.pdf?noframes=1
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