The federal banking agencies released an advisory reminding depository institutions of supervisory expectations for sound practices to manage interest rate risk. The advisory reiterates the importance of corporate governance, risk measuring and monitoring systems, stress testing, and internal controls for interest rate risk exposures. It clarifies existing guidance and describes effective interest rate riskmanagement techniques. Regulators expect institutions to have sound riskmanagement practices to measure, monitor, and control interest rate risks using processes commensurate with their complexity, business model, risk profile, and operational scope. If an institution determines that its core earnings and capital are insufficient to support its interest rate risk, it should take steps to mitigate exposure, increase capital, or both.
In an accompanying Supervision and Regulation letter to the Reserve Bank heads of supervision, the FRB noted that, although the advisory is targeted at depository institutions, the advice is also directly related to bank holding companies who should manage and control aggregate risk exposures, including interest rate risk, on a consolidated basis, while recognizing legal distinctions and possible obstacles to cash movements among subsidiaries.