Bank Analysis School September 2023 - Presentations & Resources

SENSITIVITY TO MARKET RISK ANALYSIS GUIDE

GENERAL MODEL EXPECTATIONS ¾ Project income simulations over at least a two- year period. ¾ Measure long-term interest rate risk (i.e. EVE). ¾ 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. ¾ When appropriate stress scenarios should also include: x Changes in the relationship between key market rates (basis risk). x 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: x Raise additional capital x Reduce levels of IRR exposure x Strengthen IRR management expertise x Improve IRR measurement systems RATING CRITERIA o 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. o The ability of management to identify, measure, monitor, and control exposure to market risk given the institution’s size, complexity, and risk profile. o The nature and complexity of interest rate risk exposure arising from nontradingpositions. o Where appropriate, the nature and complexity of market risk exposure arising from trading and foreign operations. APPLICABLE REGULATORY GUIDANCE o FIL-52-96: Joint Interagency Policy Statement on Interest Rate Risk o FIL-2-2010: Financial Institution Management of Interest Rate Risk o FIL-2-2012: Interest Rate Risk Management: Frequently Asked Questions

EVALUATION APPROACH

STEP ONE: ¾ Evaluate the level, trend, and relationship of key ratios to peer in the Uniform Bank Performance Report and IRRSA Report. x Pay attention to any “Red Flags” in the IRRSA Report. STEP TWO: ¾ Review the findings of prior examinations. STEP THREE: ¾ Review the balance sheet and other reports to determine balance sheet complexity and structure. STEP FOUR: ¾ Obtain interest rate risk report anddetermine: x Internal or external model? x Data based on Call Report information or captured at instrument level? STEP FIVE: x Are reinvestment rates regularly updated to match current offering rates? x Are non-maturity deposit assumptions (betas and average lives) bank-specific and reasonable given the historic stability of these accounts? x Are the effects of embedded options such as callable bonds being captured? x If significant volume of mortgage products, are prepayment speeds reasonable? STEP SIX: ¾ Evaluate the adequacy of risk management practices. Consider: x Are critical model assumptions supported and documented? x If a vendor model, has the accuracy and functionality been validated by an independent third party? x Has an independent review verified the accuracy and reasonableness of model inputs and assumptions? x Do back-testing results support the accuracy of model results? x The adequacy of internal policies and procedures for the size, complexity, and risk profile of the institution. x Compliance with regulatory guidance/expectations and internal policy. STEP SEVEN: x Review earnings-at-risk (i.e. income simulation) and capital-at-risk (i.e. EVE) results. x Assess interest rate risk exposure against current levels of earnings and capital. ¾ Review model assumptions. Determine: x Static or dynamic growth projections?