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FFIEC releases interest rate risk advisory
WASHINGTON (1/8/10)--The Federal Financial Institutions Examination Council (FFIEC) in an interest rate risk (IRR) advisory released on Thursday reiterated “the importance of effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to the IRR exposures of depository institutions.” The FFIEC is comprised of the National Credit Union Administration and the federal bank and thrift regulators. The advisory “also clarifies elements of existing guidance and describes some IRR management techniques used by effective risk managers,” the FFIEC said. While the FFIEC recognizes that financial institutions will always encounter some risk, the group said that “institutions are expected to have sound risk-management practices to measure, monitor, and control IRR exposures,” adding that financial institutions are expected to manage their exposure to risk “using processes and systems commensurate with its complexity, business model, risk profile, and scope of operations.” “Effective” risk management systems do not involve “only the identification and measurement” of risk, but the “appropriate actions to control this risk,” The FFIEC added. “If an institution determines that its core earnings and capital are insufficient to support its level of IRR, it should take steps to mitigate its exposure, increase its capital, or both,” the release said. The FFIEC release was not unexpected. As Mike Schenk, senior economist at the Credit Union National Association pointed out Thursday after the agency released the guidance, financial institutions have exposures to interest rate risk and interest rates will surely move higher in the future. “FFIEC is making it clear that this will cause rate risk exposure to be a point of emphasis in the exam process,” Schenk said, and added, “Low home prices, low mortgage interest rates, and government purchase incentives have translated into a fairly high volume of originations of fixed-rate, long-term mortgages at the nation's financial institutions - all equal more interest rate risk.” At credit unions, fixed-rate mortgages with terms greater than 15 years increased from 29% of total first mortgages outstanding to 37% of total first mortgages outstanding in the past three years. “However,” Schenk said, “it is important to remember that these 15-plus year fixed-rate mortgages represent just 9% of credit union total assets: While interest rate risk exposure has increased, it is limited when balance sheets are viewed broadly. In addition, credit unions have a long track record that makes it clear that they are very good at measuring, monitoring and controlling this risk.” For the full FFIEC advisory, use the resource link.
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