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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