CMS Case Study

 Review a sample of Board minutes to determine the role of the Board of Directors in the ALM/IRR function. Involvement should include the following: o Review of the minutes from the ALCO meetings. o Review of IRR reports on a quarterly basis. o Review the significant assumptions used in the IRR report on an annual basis or when assumptions change.  Discuss with management the key assumptions underlying the Bank’s risk measurement models to determine: o How management developed the key assumptions used in the IRR model including deposit decay rates, deposit betas, and prepayment speeds. If key assumptions are not developed based on historical data with consideration, if needed, for current economic conditions, determine whether management has evaluated why it is appropriate to use industry data. o Whether assumptions are periodically reviewed for reasonableness. o Whether major assumptions are sensitivity tested (stress tested) with results communicated to senior management and the BOD periodically. Deposit decay rates and deposit betas are generally considered appropriate to stress under various scenarios while asset prepayment speed assumptions are more appropriate during a falling rate environment. o Whether model assumptions regarding future growth are consistent with management’s budget or other projects.  For IRR models utilized by the Bank, determine the following: o If an outside vendor developed the model, obtain documentation of an independent third party test of the mechanics and mathematics of the measurement model. o If the Bank uses a model developed internally, determine whether model integrity is maintained by considering whether: 1. Sufficient documentation for the model’s methods, operating code, and data sources exist so that the model’s operation is not solely dependent on one or two key employees. 2. A source independent of the persons that developed and maintain the model has tested and validated the model’s calculations and methods.  Determine whether management is reconciling the data used in the IRR report to ensure accuracy and completeness.  Select the most recent IRR report and determine the accuracy of data inputs by performing the following procedures: o Review the Bank's general ledger and financial statements and determine if all financial instruments are included in the model. o Trace a selection of input totals to the general ledger, Call Report, or other supporting documentation as applicable.  Using the IRR report from the previous year end, conduct backtesting by evaluating whether actual results are consistent with inputs and assumptions used in the IRR reports.

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