Internal Control Questionnaires and Verification Procedures

Management and Board Supervision

1. Has the board of directors communicated to management the level of interest rate risk it is willing to assume?

2. Has management taken steps to ensure that the board of directors has an adequate understanding of the current and potential impact that interest rate risk may have on the bank’s condition?

3. Has management, with board approval, formulated sound fundamental principles and controls and provided monitoring systems to coordinate the bank’s interest rate risk decisions? Do these principles and controls:

   1. Establish lines of authority and responsibility for interest rate decisions?

   2. Establish a risk measurement system that captures and quantifies risk in a timely and comprehensive manner?

   3. Define interest rate risk limits under which management is expected to operate?

   4. Specify risk limits that address the potential loss of earnings from adverse movements in interest rates?

   5. Identify, monitor, and control the potential adverse exposure to future earnings and capital from significant medium- and long-term positions?

   6. Use variance reports to monitor the effectiveness and accuracy of interest rate risk management strategies and measurement systems?

4. Do the planning, budgeting, and new product areas consider interest rate sensitivity?

5. Are interest rate risk principles and controls reviewed at least annually to determine whether they are current?

6. Are internal management reports prepared that serve as an adequate basis for interest rate management decisions and for monitoring the results of those decisions?

7. Are reports sufficiently detailed to allow the asset/liability committee to:

   1. Determine the level of interest rate risk in the consolidated institution and the major legal entities?

   2. Assess the risk of long-term mismatches?

   3. Determine compliance with principles and controls?

   4. Evaluate the results of past strategies?

   5. Assess the potential risks and returns of proposed strategies?

8. Do periodic reports identify and describe the major assumptions used in the interest rate risk measurement process and evaluate the impact those assumptions have on measured exposures?

9. Do periodic reports describe the causes of excessive exposures, if any?

10. Does management identify and document strategies to address excessive exposures, if any?

11. Do periodic reports describe the major sources of interest rate risk exposure?

12. Does the audit function review the interest rate risk management process, including the bank’s interest rate risk management principles and controls?

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