Back-Testing of IRR Risk Measurements

Effective control of the interest rate risk requires conducting annual independent reviews of the risk management process and validation of the risk measurement systems to ensure their integrity, accuracy, and reasonableness. To meet the requirements of the Joint Policy Statement on Interest Rate Risk (IRR) and the subsequent IRR regulatory guidance, Young & Associates, Inc. can assist you in assessing the following:

  • The adequacy of your financial institution’s internal control system, including the appropriateness of institution policies, procedures, and risk tolerances used to manage and mitigate the interest rate risk
  • Personnel’s compliance with the institution’s internal control system, including the effectiveness of corporate governance consisting of oversight by the board of directors and management’s involvement in the control of interest rate risk
  • The appropriateness of the institution’s risk measurement system and its capability to address the specific interest rate-related risks given the nature, scope and complexity of the institution’s activities
  • The accuracy and completeness of the data inputs into the institution’s risk measurement system, including the verification that balances are correctly specified and that all major instruments and portfolios are captured in the risk measurement models
  • The reasonableness and validity of scenarios used in the risk measurement system, considering the institution’s nature and complexity
  • The reasonableness and validity of assumptions used in the risk measurement system, considering the institution’s existing product mix and its business strategy
  • The validity of the risk measurement calculations within the risk measurement system, including back-testing of the actual results versus forecasted results and an analysis of various variance sources

Our Interest Rate Risk Review report will assess each of the above, describe the findings, provide suggestions for any corrective actions, and include recommendations for improving the quality of the institution’s interest rate risk management system and its compliance with the regulatory guidance.