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July 2008 Report No. AUD-08-011 DSC’s Examination Assessment of Interest Rate Risk AUDIT REPORT Report No. AUD-08-011 July 2008 DSC’s Examination Assessment of Interest Rate Risk Federal Deposit Insurance Corporation Audit Results Why We Did The Audit For the 38 sampled risk management examinations we reviewed, FDIC examiners generally complied with applicable policies and procedures for assessing and addressing an institution’s The audit objectives were to internal control, review, and audit coverage of the interest rate risk management process. (1) determine whether the FDIC’s Generally, as depicted in the figure below, we found: examinations comply with applicable policies and procedures for assessing • Pre-Examination Planning memoranda listed the red flags identified by the FDIC’s Interest and addressing an institution’s Rate Risk Standard Analysis software application; and internal control, review, and audit • Reports of Examination and supporting working papers showed that examiners either coverage of the interest rate risk obtained for consideration a copy of the institution’s independent review report or management process; and identified a contravention of the IRR SOP. (2) evaluate the corrective actions pursued when significant weaknesses Regarding the pursuit of corrective actions, we found ...

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• Publié par: Irne
• Nombre de lectures: 139
• Langue: English

Extrait

   

July 2008 Report No. AUD-08-011

’ DSC s Examination Assessment of Interest Rate Risk                  

AUDIT REPORT

 

 

 

Report No. AUD-08-011 July 2008   DSC’s Examination Assessment of Interest Rate Risk   Audit Results   For the 38 sampled risk management examinations we reviewed, FDIC examiners generally complied with applicable policies and procedures for assessing and addressing an institution’s internal control, review, and audit coverage of the interest rate risk management process. Generally, as depicted in the figure below, we found: •   red flags identified by the FDIC’s InterestPre-Examination Planning memoranda listed the Rate Risk Standard Analysis software application; and •   Reports of Examination and supporting working papers showed that examiners either obtained for consideration a copy of the institution’s independent review report or identified a contravention of the IRR SOP.   Regarding the pursuit of corrective actions, we found that informal and formal corrective actions generally addressed significant weaknesses reported by examiners in the area of interest rate risk. We also noted that a provision related to interest rate risk was sometimes not included in corrective actions, even though both the composite and Sensitivity to Market Risk component ratings of the institutions by examiners were less than satisfactory. However, DSC showed that provisions addressing other ratings components reasonably addressed the identified concerns.   We also identified situations where the examiner’s assessment of an institution’s independent review and reporting to the institution’s board of directors could be improved. Specifically, we found that examinations often did not: •   provide conclusions on the adequacy of the independent review functions, or •   assess the adequacy of the institution’s reporting on the independent reviews to its board.   Additionally, training records we reviewed for 42 interest rate risk and capital markets Subject Matter Experts and Regional Specialists showed that some had obtained little or no training in recent years in their areas of expertise. Targeted training could enhance the contribution of these experts and specialists to the examination process.   Ensuring that appropriate institution and examination controls and resources are in place will help the FDIC to assure that an institution’s interest rate risk management processes are appropriate and functioning adequately. Audit Results of Sample Analysis

              Federal Deposit Insurance Corporation Why We Did The Audit   The audit objectives were to (1) determine whether the FDIC’s examinations comply with applicable policies and procedures for assessing and addressing an institution’s internal control, review, and audit coverage of the interest rate risk management process; and (2) evaluate the corrective actions pursued when significant weaknesses are reported by examiners. Interest rate risk, the exposure of an institution’s earnings and capital to adverse interest rate changes, is fundamental to the business of banking. The audit focused on FDIC-supervised institutions with indicators of elevated interest rate risk.   Background     Changes in interest rates can adversely affect a financial institution’s earnings and market capital. The FDIC’s Division of Supervision and Consumer Protection (DSC) conducts periodic risk management examinations to ascertain, among other things, an institution’s Sensitivity to Market Risk, including interest rate risk. Pre-examination Planning Memoranda DSC has issued guidance for Lis ted Red Flags conducting these examinations. Independent Reviews Obtained or 97% Contravention Cited   Additionally, theJoint Agency Policy 84% Interest  Rate Risk Provisions Statement on Interest Rate Risk(IRR  in Corrective Actions88% Included SOP), issued by the FDIC and the 61% Adequacy of Independent Review other federal banking agencies, 32% Functions Determined provides guidance to institutions on  Review Reporting to71% Independent prudent interest rate risk management Board Assessed principles and assists bankers and la pS igno  2 d % e 0 R sna tains Oblistecia ejbuSrtpeExr teat Mct nI teretR denece 0%40%60%80 s % t 100% examiners in evaluating the adequacy Rate Risk Training of an institution’s management of Source: OIG sample analysis.   interest rate risk. The IRR SOP states   that an institution’s interest rate risk Recommendations and Management Response management process should be subject to periodic independent review to ensure the integrity,  t W he e     a r d e e c q o u m ac m y e   n o d f  e a d n     t i h n a s t t   it D u S ti C o   n e ’s m  i p n h d a e si p z e e n  t d o e   n e t x  r a e m v i ie ne w r   s a  t n h d e     o n n e  t e h d e  t   o a   d f e u q ll u y a   c as y s  o e f s   s r   e a p n o d r   t c i o n n g  c o lu n  d t e h   e o   n  accuracy, and reasonableness of the  independent review to the bank’s board, as warranted by risk; advise examiners of the institution’s overall risk management  importance of collectively considering all relevant examination guidance; and establish policies process. Overall, the purpose of the  and guidelines for the training of interest rate risk and capital markets Subject Matter Experts independent review is to ensure that the interest rate risk measurement and  r a e n s d p   o R n e s g i i v o e n  a al c   t S io p n e . c   ialists.  Management concurred with our recommendations and is taking  management processes are sound. To view the full report, go toper8strovog.002/fdw.igicwwa.ps

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Contents Page       BACKGROUND    Institution Guidance in the Statement of Policy on Interest Rate Risk    FDIC Examination Guidance   RESULTS OF AUDIT   EXAMINER ASSESSMENT OF AN INSTITUTION’S INDEPENDENT REVIEW AND REPORTING TO THE BOARD OF DIRECTORS  Joint Agency Statement of Policy on Interest Rate Risk    Examination Guidance Related to the Independent Review         Examiner Determination of the Adequacy of Independent Reviews       Examiner Assessment of an Institution’s Reporting to Its Board of  Directors on the Independent Reviews       Examiner Implementation of Guidance on Independent Reviews       Reliance on Independent Reviews and Management Systems  Recommendations on Examiner Assessment of an Institution’s  Independent Review and Reporting to the Board of Directors   INTEREST RATE RISK TRAI NING FOR SUBJECT MATTER EXPERTS AND REGIONAL SPECIALISTS    Training Guidance    Subject Matter Expert and Regional Specialist Training    Establishment of Policy for Continuing Education    Maintenance of Human Capital Resources         Recommendation on Interest Rate Risk Training for Subject Matter  Experts and Regional Specialists   CORPORATION COMMENTS AND OIG EVALUATION     APPENDICES  1. OBJECTIVES, SCOPE, AND METHODOLOGY  2. CORPORATION COMMENTS  3. MANAGEMENT RESPONSE TO RECOMMENDATIONS  4. ACRONYMS USED IN THE REPORT     TABLE Scope and Annual Reporting Expectations for an Institution’s Independent Review         FIGURE   Examination Conclusions Not Provided on the Scope of the Independent Reviews  

 

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Office of Audits Office of Insector Gener al

Federal Deposit Insurance Corporation 3501 Fairfax Drive, Arlington, VA 22226   DATE: July 7, 2008   MEMORANDUM TO: L. Thompson, Director Sandra  Division of Supervision and Consumer Protection      /Signed/ FROM:Russell A. Rau  Assistant Inspector General for Audits   SUBJECT:DSC’s Examination Assessment of Interest Rate Risk      (Report No. AUD-08-011)       This report presents the results of our audit of the Division of Supervision and Consumer Protection’s (DSC) examination assessment of interest rate risk at FDIC-supervised institutions. The audit objectives were to (1) determine whether the FDIC’s examinations comply with applicable policies and procedures for assessing and addressing an institution’s internal control, review, and audit coverage of the interest rate risk management process; and (2) evaluate the corrective actions pursued when significant weaknesses are reported by examiners. 1  We focused the audit on those FDIC-supervised institutions with indicators of elevated interest rate risk. We conducted this performance audit in accordance with generally accepted government auditing standards. Appendix 1 of this report discusses our audit objectives, scope, and methodology in detail.     BACKGROUND   Interest rate risk is fundamental to the business of banking. Changes in interest rates can expose an institution to adverse shifts in net interest income, increase the cost of funds, and impair the underlying value of its assets, thereby adversely affecting an institution’s earnings and market capital. The FDIC is responsible for ensuring that the financial institutions it supervises operate in a safe and sound manner. To accomplish this, the FDIC conducts risk management examinations to ascertain, among other things, an institution’s Sensitivity to Market Risk, including interest rate risk. This assessment is summarized in an assigned risk rating for Sensitivity to Market Risk, which is the “S”  

                                                           1 The FDIC generally initiates informal or formal corrective action against institutions with a composite safety and soundness rating (see footnote 2) of “3,”“4,” or “5,” unless specific circumstances warrant otherwise.   

 

   

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