Bank Analysis School Case Study

Certified Public Accountants & Advisors

June 8, 20 X 4

Board of Directors:

At your request, we performed certain selected procedures involving the Bank's Interest Rate Risk (IRR) measurement process. These procedures were completed during April, May, and June 20 X 4 using information primarily as of December 31, 20 X 3

AUDIT FINDINGS r RECOMMENDATIONS, AND SUGGESTIONS

There were no findings, recommendations, or suggestions identified during the course of the engagement.

AUDIT SCOPE

Sensitivity to Market Risk

Sensitivity to market risk entails, in part, the degree to which changes in interest rates can adversely affect earnings or the economic value of capital. The ability of management to identify, measure, monitor, and control exposures to market risk is thereby critical. The Bank's Board of Directors has adopted a policy defining, in general terms, IRR and establishing strategic latitude for management of this risk. Risk limitations relative to NII and EVE are specifically defined under various rate scenarios within the policy. The limits, established for possible rate environment changes, are generally commensurate with the size and complexity of the Bank. The roles of both the Board of Directors and senior management were outlined to facilitate ·-oversight, ·with-the estaolishmenr of the ALCO to steer-this effofC-Additiohally, an independent review function and validation of the integrity of the data used within the model is required within the policy. The Bank uses a third-party vendor, The Baker Group, to model !RR exposure on a quarterly basis. The Baker Group uses their Interest Rate Risk Monitor (version 4, release 6) modeling software. Information is supplied to The Baker Group primarily in electronic format. The Baker Group independently generates simulation NII and market value reports to facilitate the identification and measurement of risk. Policy Through our review of the ALM Policy, reviewed and approved by the Board of Directors in March 20 X 3, we determined that it adequately addresses pertinent items such as Board of Directors and senior management oversight, strategies, risk limits, identification, measurement, monitoring, and reporting. In addition, the Policy indicates there are clear lines of responsibility and appropriate guidelines for measuring and managing the risk exposures, as we!! as procedures regarding exceptions to the Policy. The Policy also covers, on a limited basis, validation of the integrity of the data used with the model and independent review.