tailieunhanh - Interest-Rate Risk Management Section 3010.1

It is difficult to discern exposures from institutions’ reported credit market posi- tions. Indeed, common data sources such as annual reports and regulatory filings record accounting measures on a large and diverse number of credit market instruments. Ac- counting measures are not necessarily comparable across positions. For example, the economic value of two loans with the same book value but different maturities will react quite differently to changes in interest rates. At the same time, many instruments are close substitutes and thus entail essentially the same market risk. For example, a 10 year government bond and a 9 year high-grade mortgage bond will tend to respond similarly to. | Interest-Rate Risk Management Section Interest-rate risk IRR is the exposure of an institution s nancial condition to adverse movements in interest rates. Accepting this risk is a normal part of banking and can be an important source of proíìtabiiíiv and shareholder value. However excessive levels of IRR can pose a signi cant threat to an institution s earnings and capital base. Accordingly effective risk management that maintains IRR at prudent levels is essential to the safety and soundness of banking institutions. Evaluating an institution s expo sure to changes in interest rates is an important element of any full-scope examination and for some institutions may be the sole topic for specialized or targeted examinations. Such an evaluation includes assessing both the adequacy of the management process used to control IRR and the quantitative level of exposure. When assessing the IRR management process examiners should ensure that appropriate policies procedures management information systems and internal controls are in place to maintain IRR at prudent levels with consistency and continuity. Evaluating the quantitative level of IRR exposure requires examiners to assess the existing and potential future effects of changes in interest rates on an institution s nancial condition including its capital adequacy earnings liquidity and where appropriate asset quality. To ensure that these assessments are both effective and ef cient examiner resources must be appropriately targeted at those elements of IRR that pose the greatest threat to the nancial condition of an institution. This targeting requires an examination process built on a well-focused assessment of IRR exposure before the on-site engagement a clearly de ned examination scope and a comprehensive program for following up on examination ndings and ongoing monitoring. Both the adequacy of an institution s IRR management process and the quantitative level of its IRR exposure should be assessed. Key .