BAS September 2022 Presentations

SENSITIVITY TO MARKET RISK ANALYSIS GUIDE

GENERAL MODEL EXPECTATIONS (REGULATORY GUIDANCE)   Project income simulations over at least a two‐year period.   Measure long‐term interest rate risk (i.e. EVE).   Perform rate shocks (immediate/parallel) up to 400 basis points.  Scenarios should be severe but plausible in light of the existing  level of rates and the interest rate cycle.   When appropriate stress scenarios should also include:   Changes in the relationship between key market rates (basis  risk).   Changes in the slope and shape of the yield curve (yield  curve risk).  Material weakness in risk management processes or high levels of  IRR exposure relative to capital will require corrective action, such  as:   Raise additional capital   Reduce levels of IRR exposure  RATING CRITERIA (SEE APPENDIX I)   The sensitivity of the financial institution’s earnings or the  economic value of its capital to adverse changes in interest rates,  foreign exchange rates, commodity prices, or equity prices.   The ability of management to identify, measure, monitor, and  control exposure to market risk given the institution’s size,  complexity, and risk profile.   The nature and complexity of interest rate risk exposure arising  from nontradingpositions.   Where appropriate, the nature and complexity of market risk  exposure arising from trading and foreign operations.  APPLICABLE  REGULATORY GUIDANCE   FIL‐52‐96: Joint Interagency Policy Statement  on Interest Rate Risk   FIL‐2‐2010: Financial Institution Management  of Interest Rate Risk   FIL‐2‐2012: Interest Rate Risk Management: Frequently Asked  Questions  Strengthen IRR management expertise   Improve IRR measurement systems 

EVALUATION APPROACH 

STEP 1:   Review the findings of prior examinations.  STEP 2:   Evaluate the level and trend of ratios in the IRRSA Report and UBPR.     “Red Flags” in the IRRSA Report.   Long Term Assets to Total Assets Ratio (IRRSA).   Historical deposit rate sensitivity to Federal Funds (IRRSA).   Contractual Maturity/Repricing Net Over 3 Year Position (UBPR pg. 9).   Key capital and earnings ratios (UBPR).  STEP 3:   Review the balance sheet and other reports (e.g. securities inventory) to  determine balance sheet complexity and structure.  STEP 4:   Determine if data in the interest rate risk report is based on Call Report  information  (less precise) or captured at instrument level  (more precise). STEP 5:   Review model assumptions and determine:  Static or dynamic growth projections?   Are reinvestment rates regularly updated to match current offering rates?   Are non‐maturity deposit assumptions (betas and decay rates/average lives)  bank‐specific and/or reasonable given the historic stability of these accounts?   Are the effects of embedded options such as callable bonds being captured?   If significant volume of mortgage products, are prepayment speeds reasonable?    STEP 6:   Review model results (e.g. income simulation and economic value of equity)  and assess interest rate risk exposure against current levels of earnings and capital. STEP 7:   Evaluate the adequacy of risk management practices for the size, complexity,  and risk profile of the bank.  Consider:  Are critical model assumptions (e.g. non‐maturity deposits) supported and  documented?   If a vendor model, has the model math been validated by an independent  third party?   Has an independent review verified the overall interest rate risk process,  including the accuracy and reasonableness of model inputs and assumptions?   Do back‐testing results support the accuracy of model results?   Are internal policies and procedures adequate for the size, complexity, and risk  profile of the institution?   Has compliance with regulatory guidance/expectations and internal policy been  achieved?