The Board of Directors of the Federal Deposit Insurance
Corporation today approved a policy statement on sound practices
for managing interest rate risk in commercial banks. The Federal
Reserve Board will consider this policy statement later in the
month, and the Comptroller of the Currency is expected to approve
The statement emphasizes that a bank's board and senior
management must exercise adequate oversight over the bank's
interest rate risk exposure and must develop and maintain a
comprehensive process for managing that risk. It identifies the
key elements of sound interest rate risk management and describes
prudent practices for each of these elements.
The policy statement does not include a standardized
framework for measuring interest risk. "After much deliberation,
the agencies have elected not to pursue a standardized measure
and explicit capital charge for interest rate risk at this time,"
the agencies said in the preamble to the statement. "This
decision reflects concerns about the burden, accuracy, and
complexity of a standardized measure and recognition that
industry techniques for measuring interest rate risk are
continuing to evolve. Rather than dampening incentives to
improve risk measures by adopting a standardized measure at this
time, the agencies hope to encourage these industry efforts."
In August 1995, the FDIC, the Federal Reserve Board, and
the Office of the Comptroller of the Currency adopted a joint
regulation that requires them to include in their evaluation of a
bank's capital adequacy an assessment of its exposure to
reductions in capital caused by changes in interest rates. At
the same time, the agencies issued for comment a proposed policy
statement, which the Board finalized today.
The agencies said they will continue to monitor industry
developments in risk measurement techniques. As improvements
are made, the agencies will reassess the feasibility of
establishing more rigorous supervisory measurement systems and
explicit capital treatment for interest rate risk.
When evaluating a bank's capital adequacy for interest rate
risk, the agencies will continue to consider both the level of
its exposure and the quality of its risk management. The
agencies will continue to rely on their examination processes to
achieve these goals.
The agencies also will continue to use various quantitative
tools to assist examiners in identifying banks that have high
exposure or a complex risk profile that requires a more
sophisticated interest rate risk management process. For
example, the agencies could use interest rate risk filters to
monitor exposures, to make preliminary assessments about the
nature and scope of a bank's risk, and to direct examination
If the agencies determine that a bank has material
weaknesses in its risk management process and/or high levels of
interest rate risk exposure relative to its capital base, they
will direct the bank to take corrective action. Such actions may
include directives to raise additional capital, reduce exposures,
strengthen management expertise and/or improve risk measurement
The statement is effective upon publication in the Federal
Congress created the Federal Deposit Insurance Corporation in
1933 to restore public confidence in the nation's banking system.
The FDIC insures deposits at the nation's 12,000 banks and
savings associations and it promotes the safety and soundness of
these institutions by identifying, monitoring and addressing
risks to which they are exposed.
FDIC press releases and other documents are available on the
Internet via the World Wide Web at www.fdic.gov.
They may also be obtained through the FDIC's Public Information
Center, 801 17th St. NW, Room 100, Washington, DC,