The FDIC issue a Financial Institution Letter (“FIL-46-2013”) reminding FDIC-insured state nonmember banks (“Banks”) of the importance of developing and implementing a comprehensive asset-liability and interest rate risk management program that addresses the special challenges of the current interest rate environment. The FDIC stated that a number of Banks had reported “a significantly liability-sensitive balance sheet position, meaning that a marked increase in interest rates could adversely affect net interest income and, in turn, earnings performance.” The FDIC cautioned Banks that in a rising interest rate environment liability-sensitive Banks could also experience a deposit run-off and “rate sensitive liabilities may re-price faster than earning assets as coupons on variable rate loans and investments remain below the floor.”
FIL-46-2013 updates the interest rate risk management guidance provided in January 2010 by the FDIC and other Federal financial regulators at a time when interest rates were approaching historic low levels. The January 2010 interagency guidance, entitled “Advisory on Interest Rates Risk Management” was discussed in the January 12, 2010 Financial Services Alert.
In FIL-46-2013, the FDIC discussed its supervisory expectations with respect to a Bank’s interest rate risk management regarding:
- Board and Management Oversight (asset-liability management should be an ongoing process);
- Policy Framework and Prudent Exposure Limits (policies and exposure limits should be reviewed at least annually and should formalize the Board’s risk philosophy);
- Effective Measurement and Monitoring of Interest Rate Risk (use multiple types of data to measure interest rate risk; consider a variety of modeling techniques); and
- Risk Mitigation Strategies (including hedging positions, embedded optionality and other strategies).
The FDIC further stated that its examiners will consider the amount of unrealized losses in a Bank’s investment portfolio “and the degree to which [Banks] are exposed to the risk of realizing losses from depreciated securities” in the FDIC’s supervisory assessment of a Bank’s capital adequacy and liquidity and in assigning CAMELS ratings to a Bank.