On January 7, 2010, the Federal Financial Institutions Examination Council (the “FFIEC”) issued an advisory to remind institutions of supervisory expectations for sound practices to manage interest rate risk (“IRR”). Regulators expect all institutions to manage their IRR exposures using processes and systems commensurate with their earnings and capital levels, complexity, business model, risk profile and scope of operations. Regulators have historically expressed a strong interest in IRR, as changes in interest rates have the potential of reducing a bank’s earnings and lowering its net worth. Because it is a critical component of the business of banking, IRR cannot be entirely eliminated but must be effectively monitored and managed. In the current environment of historically low short-term interest rates, regulators have reiterated in this advisory the importance of institutions having robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates.
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