Multistate Mortgage Committee Sensitivity To Market Risk Examination Procedures

multistate mortgage committee sensitivity to market risk examination procedures examination procedures [document supporting evide

Multistate Mortgage Committee
Sensitivity to Market Risk
Examination Procedures
Examination Procedures
[Document supporting evidence noting determinations and findings made]
Y
N
1
Are policies, procedures, and risk limits related to IRR adequate?
Examiner Notes:
2
Are internal controls related to IRR adequate?
Examiner Notes:
3
Are the audit or independent IRR review functions adequate?
Examiner Notes:
4
Are information communication systems related to IRR adequate and
accurate?
Examiner Notes:
5
Do the characteristics of the institution's assets, funding sources,
and financial derivative contracts indicate a low Interest Rate Risk
(IRR) profile?
Examiner Notes:
6
Is the level of risk reasonable relative to capital and earnings
levels?
Examiner Notes:
7
Do the board and senior management effectively supervise IRR?
Examiner Notes:
8
Review prior examination reports, file correspondence for an overview
of any previously identified rate sensitivity concerns, as well as the
institution’s independent review for any recommendations or
suggestions.
Examiner Notes:
9
Review board or committee minutes for evidence of oversight,
responsibility, routine management reports, and any identified rate
sensitivity concerns.
Examiner Notes:
10
Determine if there are any recent or planned changes in strategic
direction and discuss with management the implications for rate
sensitivity risks.
Examiner Notes:
11
Review Rate Sensitivity policies. Policy guidance may be incorporated
within Liquidity, Loan, Investment, Interest Rate Risk (IRR) or other
policies, but taken as a whole, should provide sufficient guidance to
management relative to the board's risk tolerances and oversight
responsibilities. Policy formality and sophistication will vary,
depending upon the level of the institution's risk and the complexity
of its holdings and activities, but should:
*
Provide authority and responsibility to an individual(s) or
committee for establishing and maintaining an effective IRR
management program which identifies, measures, monitors, and
controls IRR;
*
Identify the types of instruments and activities that may be used
to manage IRR exposure;
*
Provide for a measurement system that is commensurate with the
size and complexity of the institution;
*
Establish earnings and capital exposure limitations commensurate
with the risk tolerance; and
*
Provide responsibility for authorizing policy exceptions.
Examiner Notes:
12
Determine that the board approves and periodically reviews policies
and procedures related to IRR.
Examiner Notes:
13
Discuss IRR management processes and practices with management.
Consider attending an ALCO meeting to evaluate the process. Potential
topics for discussion include:
*
Development of IRR policies and practices;
*
Development or choice of IRR measurement systems;
*
Assumptions used by the IRR measurement system; and
*
Technical expertise of staff relative to the complexity of
products used and the complexity of the IRR measurement system.
Examiner Notes:
14
Determine whether the potential IRR impact is considered for all new
strategic initiatives or products.
Examiner Notes:
15
Determine if procedures and risk limits are reasonable relative to
management abilities, current economic conditions, and the overall
condition of the institution.
Examiner Notes:
16
Determine if sufficient separation of duties or comparable controls
exist over the development and use of IRR measurement systems and
monitoring tools.
Examiner Notes:
17
Determine that internal management reports used as a basis for IRR
management decisions are prepared regularly and reviewed by senior
management and the board of directors, at least quarterly.
Examiner Notes:
18
Determine if management complies with IRR policy parameters and
documents the reasons for variances.
Examiner Notes:
19
Determine that the scope of the audit or independent review is
sufficient to identify policy, reporting, internal control, and
compliance deficiencies.
Examiner Notes:
20
Determine that the scope includes a review and validation of risk
measurement calculations and tests for reasonableness and accuracy of
assumptions and data inputs. The scope and formality of the review and
validation should reflect the size and complexity of the institution.
Examiner Notes:
21
Determine that results are reported to the board on a timely basis.
Examiner Notes:
22
If recent reviews disclosed any deficiencies, determine if management
responses are reasonable.
Examiner Notes:
23
Determine if internal management reports provide sufficient
information for ongoing interest rate risk management decisions and
for monitoring the results of those decisions. Reports should contain
sufficient detail for the board or committee and senior management to:
*
Analyze IRR levels and trends and measure effects on earnings and
capital;
*
Identify material risk exposures and sources;
*
Evaluate key assumptions, including interest rate forecasts,
deposit behavior, and loan prepayments;
*
Assist management in pricing decisions; and
*
Verify compliance with risk limits and policy guidelines,
including exception reporting.
Examiner Notes:
24
Determine if interest rate risks are effectively communicated to all
areas affected.
Examiner Notes:
25
Consider testing IRR reports for accuracy by comparing with regulatory
reporting schedules and subsidiary records.
Examiner Notes:
26
Determine whether recent or anticipated structural changes or trends
in balance sheet composition alter the IRR profile relative to
historical data. When significant structural changes have or are
expected to occur, de-emphasize historical analysis and focus on
current and forecasted balance sheet composition. Significant
structural changes may include:
*
Major shift in the maturity (repricing) characteristics of the
investment portfolio, loans, or borrowings;
*
Increased holdings of financial instruments such as mortgage
securities, callable securities, fixed-rate residential loans,
and structured notes;
*
Fundamental change in funding sources; and/or
*
Unexpected change in level or trend of securities appreciation
and depreciation.
Examiner Notes:
27
Analyze the historical volatility of the net interest margin (NIM) and
net operating income (NOI) relative to:
*
Correlation with market interest rate fluctuations;
*
Management strategies to minimize the effect on earnings and
capital;
*
Ability of earnings to absorb reductions in net interest margin
resulting from market volatility; and
*
Reliance on rate sensitive noninterest income activities.
Examiner Notes:
28
Determine the level of IRR from the results of the internal
measurement system.
Examiner Notes:
29
Determine whether the board provides adequate IRR management
resources. Consider the following items:
*
Sufficient staff to operate measurement systems, including
back-up personnel;
*
Technical expertise consistent with the institution's
complexity, risk profile, and measurement system; and
*
Adequate training and staff development.
Examiner Notes:
30
Determine if historical performance related to IRR indicates adequate
board and senior management oversight.
Examiner Notes:
31
Determine if the board and senior management can effectively oversee
planned initiatives related to IRR.
Examiner Notes:
32
Determine what actions management has taken or plans to take if IRR
policy limitations are breached.
Examiner Notes:
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