IRR Regulatory Update

The FDIC recently issued FIL-46-2013 Managing Sensitivity to Market Risk in a Challenging Interest Rate Environment. This letter does not represent new guidance but instead reiterates regulatory guidelines established in 2010 and gives an indication of where examiners may be focusing in the coming months.
 
Important issues to consider from this letter include the following:

• Be sure your IRR policy has been approved by the board of directors in the past twelve months and critically evaluate your policy limits for appropriateness. Examiners may challenge limits deemed to be too high, so take a close look at your limits for changes in NII and EVE for appropriateness (especially in a rising rate environment).
• Regularly review the results of your IRR modeling to ensure your understanding of the results, the nature of the bank’s exposure, and the key risk drivers for the measured exposure. Examiners will expect management to display a clear understanding of the bank’s IRR profile and what strategies can be undertaken to mitigate the measured risk.
• If your bank’s investment portfolio holds longer-term duration securities, then verify that the portfolio is being evaluated for sensitivity to rising rates and the resultant impact to earnings and capital in your IRR modeling. If the measured sensitivity to rising rates approaches or exceeds policy limits, then determine what strategies can be undertaken to manage this risk.
• Consider providing IRR reporting to your board of directors periodically, even if reporting regularly goes to the ALCO. The board has ultimate responsibility for governance and risk management oversight, and it’s important for your board to have an adequate understanding of the bank’s interest rate exposure.

Click here to read the complete FIL, which is not a long document. We strongly recommend you read the FIL and be prepared to address these issues with your examiners in your next exam.
 
Should you have any questions, please do not hesitate to contact James Mihills, senior manager, financial institutions consulting.