Principles for the Management of Interest Rate Risk

In September 1997, the Bank for International Settlement’s Supervision Subcommittee issued a document outlining eleven Principles for the Management of Interest Rate Risk.  Regulatory agencies throughout the world are in the process of modifying their regulations to embody these principles. Here is a summary of the document.

Principle 1: Board Of Director’s Responsibility
The Board Of Directors Should Approve Interest Rate Risk Policies & Procedures And Should Be Regularly Informed Of The Bank’s IRR Exposure

Principle 2: Senior Management’s Responsibilities
Senior Management Should Ensure The Structure Of The Bank’s Business & Level Of IRR Assumed Is Effectively Managed, According To Policy & Within Established Controls & Limits, With Sufficient Dedicated Resources

Principle 3: Independent Risk Management Function
Banks Should Have A Risk Management Function With Clearly Defined Duties That Reports Risk Exposures To Management & Board And Is Independent From The Business Lines Of The Bank

Principle 4: Defined Policies
A Bank’s IRR Policies & Procedures Should Be Clearly Defined & Consistent With The Nature & Complexity Of The Bank’s Activities

Principle 5: New Product & Activity Review
Prior To Introduction, A Bank Should Identify the Risk Inherent in New Products & Activities & Ensure Proper Procedures and Controls Are In Place

Principle 6: Risk Measurement Standards
A Bank’s IRR Measurement Systems Should Be Capable Of Capturing All Material Sources Of Risk & Assumptions Underlying The Measurement Should Be Clearly Understood By The Board & Management

Principle 7: Risk Limits
A Bank Must Establish & Enforce Operating Limits & Other Practices That Maintain IRR Exposures Within Levels Consistent With Their Internal Policies

Principle 8: Extreme Condition IRR Analysis
Banks Should Measure Their Vulnerability to Loss Under Stressful Market Conditions - Including Breakdown Of Key Assumptions - And Consider Results In Establishing & Reviewing IRR Policies & Limits

Principle 9: Information
Banks Must Have Adequate Information Systems For Monitoring & Reporting IRR Exposures To Senior Management & The Board On A Timely Basis

Principle 10: Independent Review Of Controls
Banks Should Have Adequate Internal Controls For IRR Management & Should Evaluate The Adequacy & Integrity Of These Controls Periodically By Individuals Independent Of The Functions They Are Reviewing

Principle 11: Regulatory Supervision
The Supervisory Authorities Should Obtain From Banks Sufficient & Timely Information With Which To Evaluate The Level Of IRR, Considering Appropriate Ranges Of Maturities, & Investment Account Distinctions

For the complete text of this article please look at the BIS website.