CMS Case Study

Attachment A Asset/Liability Management (ALM), Interest Rate Risk (IRR) and Investment Procedures ALM and IRR Procedures  Determine if management has implemented significant changes in the Bank’s IRR strategies or exposures since the previous internal audit via inquiry of management.  Determine the current status of prior internal audit recommendations.  Determine the current status of findings related to IRR/ALM noted in the most recent regulatory examination report.  Review the Bank's Asset Liability Management (ALM)/Interest Rate Risk (IRR) policy and procedures and determine if: o Roles and responsibilities of ALCO members are defined. o The policies were approved by the Board within the previous year. o The policy defines a risk management process for identifying, measuring, monitoring, and controlling interest rate risk. o The policy establishes risk tolerances for the following: 1. Net interest income (earnings at risk) under specified levels of rate changes. 2. Economic value of equity (capital at risk) under specific interest rate scenarios. o The policy defines the types of instruments that may be utilized to manage interest rate exposure. o The IRR policy includes the requirement to back ‐ test the model annually.  Determine whether the IRR measurement systems used by the Bank: o Provide estimates of the Bank’s exposures in a timely manner (before the next quarter end). o For investments, call options and mortgage backed security prepayments are considered in the model, if significant. o Derivatives, if significant, are considered in the model. o Measure the Bank’s net interest income (earnings at risk) from changes in interest rates. o Measure the Bank’s economic value of equity (capital at risk) from changes in the economic value of equity. o Include the impact of rising and falling rate environments (+/ ‐ 100 – 400 basis points) over a 24  ‐ month time horizon. o Include parallel and non ‐ parallel shifts in the yield curve. o Include a gap analysis.  Determine whether the ALCO is comprised of members with knowledge of multiple lines of business. Ensure at least one member of the Board of Directors also serves on the ALCO.  Review a sample of minutes of ALCO meetings to determine if they include the following items: o Discussion of the impact on the IRR of new products or activities, if applicable.

o Authorization of policy exceptions, if applicable. o A review of the IRR report on a quarterly basis. o Discussion of model assumptions and changes thereto. o Discussion of interest rates.

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