Credit Management Policy Checklist - DICO



|Review Checklist |

|Part A – Regulatory Policies and Procedures |

|Pursuant to O. Reg. 237/09 s. 71(1) has the credit union established, for the purposes of managing exposure to interest rate risk, policies |

|and procedures that address the following matters: |

|The limits on the credit union’s exposure to interest rate risk and on the impact of this exposure on its net |Yes |No |NA |

|interest income and surplus. The limits must be clear and prudent. | | | |

|The techniques to be used to calculate the amount of the credit union’s exposure to interest rate risk. |Yes |No |NA |

|The internal controls to be implemented to ensure compliance with the policies and procedures. |Yes |No |NA |

|The corrective action to be taken if the limits on the credit union’s exposure to interest rate risk are |Yes |No |NA |

|exceeded. | | | |

|The content and frequency of reports to be made to the board of directors by the management of the credit union|Yes |No |NA |

|about the management of the credit union’s exposure to interest rate risk. | | | |

|Do the limits take into account fluctuations in interest rates that might reasonably be expected to occur? |Yes |No |NA |

|O.Reg. 237/09, s. 71(2). | | | |

|Class 2 Credit Unions Only | | | |

|For a Class 1 credit union, the limits must limit changes in net income to changes that do not exceed 0.15 per |Yes |No |NA |

|cent of the credit union’s total assets. O. Reg. 237/09, s. 71 (3). | | | |

|Do the policies and procedures require that the management of the credit union submits a report to the board of|Yes |No |NA |

|directors and the Corporation if the credit union’s exposure to interest rate risk exceeds the limits | | | |

|established in the policies and procedures, and that the report must be submitted within 21 days after limits | | | |

|have been exceeded? O. Reg. 237/09, s. 71(4). | | | |

|Do the policy and procedures require that the report (required pursuant to s. 71(4) must include the following? O. Reg. 237/09, s. 71(5) |

|(a) describe the circumstances that led to the credit union’s exposure to interest rate risk exceeding the |Yes |No |NA |

|limits | | | |

|(b) describe the effect that this exposure has had, and may have, on net income |Yes |No |NA |

|(c) describe the steps taken to bring this exposure within the limits |Yes |No |NA |

|(d) include a schedule indicating when the credit union will comply with its policies and procedures |Yes |No |NA |

|Are the policies approved by the board of directors of the credit union? O. Reg. 237/09, s. 71(6) |Yes |No |NA |

|Part B – Interest Rate Risk That Exceeds Limits |

|Is the credit union’s exposure to interest rate risk within the limits established in its policies and |Yes |No |NA |

|procedures? | | | |

|If “No”, has the credit union immediately taken steps to bring its exposure within those limits? O. Reg. |Yes |No |NA |

|237/09, s.72(1) | | | |

|Have the violation been within 2 consecutive quarters? |Yes |No |NA |

|If the limit has been exceeded for 2 consecutive quarters, has the credit union promptly submitted to the |Yes |No |NA |

|Corporation a plan approved by the board of directors that describes the steps the credit union intends to take| | | |

|to bring its exposure to interest rate risk within those limits? O. Reg. 237/09, s. 72(2) | | | |

|Part C – General Policy Considerations |

|Does the policy address the following? |

|Prudent portfolio limits on the mix of balance sheet assets (e.g. loans by credit category, financial |Yes |No |NA |

|instruments, etc.)? | | | |

|Various strategies to manage the size and types of deposits and borrowings so as to minimize the cost of funds |Yes |No |NA |

|and maximize opportunities to finance growth? | | | |

|Policy alternatives for cost effective management of the Deposit base? |Yes |No |NA |

|(Pricing, penalties, authorization to withdrawal, etc.) | | | |

|The diversification of members’ deposits by origin and term structure? (policies should encourage that funding |Yes |No |NA |

|is not duly concentrated with respect to: | | | |

|an individual member | | | |

|market source of deposit (e.g. commercial vs. Personal) | | | |

|deposit term to maturity | | | |

|foreign currency | | | |

|The use of brokered deposits to manage interest rate risk, if applicable? |Yes |No |NA |

|The use of borrowings to manage the asset portfolio? |Yes |No |NA |

|Who is responsible for the management of structural risk in accordance with policy including authority to set |Yes |No |NA |

|interest rates in accordance with deposit pricing policies? | | | |

|Reasonable limits on the term of loans and deposits? (Note: there are no regulatory requirements for the |Yes |No |NA |

|maximum term on any assets or liabilities which a credit union can assume.) | | | |

|That maturities and cash flows correlate to asset maturities and cash flows? |Yes |No |NA |

|Prudent assumptions used for the shock test? |Yes |No |NA |

| | | | |

|(Explain anything less than ½%) | | | |

|Part D – Financial Margin |

|Is the Financial Margin of the credit union measured at least quarterly and compared to plan and historical |Yes |No |NA |

|earnings? | | | |

|Are differences in expected performance explained in terms of the unanticipated behaviour of factors impacting |Yes |No |NA |

|spread? | | | |

|Part E – Foreign Currency Exposures |

|Does the policy establish whether the credit union may hold material foreign currency positions, and if so, how|Yes |No |NA |

|much foreign currency can remain un-hedged? | | | |

|Where a significant amount of foreign currency liabilities are held by the credit union, is the Canadian dollar|Yes |No |NA |

|impact of unrealized gains or losses of these liabilities measured and disclosed to the board at least | | | |

|quarterly? | | | |

|If the amount of unrealized gains or losses is material, does the credit union measure its foreign exchange |Yes |No |NA |

|risk more frequently? | | | |

|Does the policy require that significant amounts of foreign currency deposits be matched against loans or |Yes |No |NA |

|investments in the same currency and with the same return? | | | |

|Part F – Financial Derivatives |

|Does the policy either prohibit or authorize the purchase of derivatives to manage interest rate risk within |Yes |No |NA |

|regulatory limits, or whether they will be used to hedge (i.e. eliminate) specified types of risk (e.g. foreign| | | |

|currency risk)? | | | |

|Does the policy prohibit the use of derivatives for speculative purposes? |Yes |No |NA |

|Does the policy establish a list of authorized instruments to use in implementing hedging strategies? |Yes |No |NA |

|Is expert consultation required when purchasing derivatives? |Yes |No |NA |

|If using brokers, is a list of approved brokers for derivative transactions documented? |Yes |No |NA |

|Does the policy outline the authorization for entering into derivative instruments transactions? |Yes |No |NA |

|Does the policy require that all derivative transactions are reported to the board at the next meeting |Yes |No |NA |

|immediately following the inception of any derivative transactions? | | | |

|Does the policy require that if the board believes that a derivative transaction is used for a purpose other |Yes |No |NA |

|than permissible interest rate risk management or hedging, the transaction must be unwound or another | | | |

|derivative purchased to hedge that transaction? | | | |

|Does the policy mandate the appropriate monitoring of derivative transactions and positions? Monitoring should |Yes |No |NA |

|consist of: | | | |

|appropriate contract documentation | | | |

|reliable systems for measuring risk | | | |

|monitoring processes that are independent of the employees authorized to invest in derivatives | | | |

|appropriate accounting treatment and disclosure | | | |

|Does the policy specify the corrective actions to be taken to unwind or neutralize derivative transactions, or |Yes |No |NA |

|appropriate contingency plans for unexpected balance sheet or interest rate developments? | | | |

|Part G – Interest Rate Risk Reports |

|Does the credit union prepare a report at the end of each quarter of its fiscal year on its management of the |Yes |No |NA |

|credit union’s exposure to interest rate risk? O. Reg. 237/09, s. 73(1) | | | |

|Does the report include all information about the management of interest rate risk that the credit union has |Yes |No |NA |

|filed with the Corporation? O. Reg. 237/09, s. 73(2) | | | |

|Is the quarterly report presented at the next board meeting immediately after it is prepared and does the board|Yes |No |NA |

|review it? O. Reg. 237/09, s. 73(3) | | | |

|Is the IRR exposure accurately calculated in accordance with policy? |Yes |No |NA |

|Do the shock test results comply with policy? |Yes |No |NA |

|Do the assets & liabilities on the gap schedule balance compared to the balance sheet? |Yes |No |NA |

|Do the shock test measurements indicate a negative or positive impact on income for both an increase and |Yes |No |NA |

|decrease in interest rates? | | | |

|If “NO”, is management able to provide an explanation for this? |Yes |No |NA |

|Does the Board report accurately reflect the structural risk position of the institution? |Yes |No |NA |

|Does the report include all of the information required by policy? |Yes |No |NA |

|Part H – Interest Rate Risk Measurement Systems (Class 2 Credit Unions Only) |

|Does the IRR Measurement System generate all cash flows for all products? |Yes |No |NA |

|Is the IRR Measurement System able to modify cash flows for assumptions regarding unscheduled principal |Yes |No |NA |

|prepayments and deposit redemption behaviour? | | | |

|Does the IRR Measurement System include the availability of modeling non-term balances? (capital, chequing, |Yes |No |NA |

|savings, variable rate loans) | | | |

|Part I – Earnings At Risk (EaR) |

|On an annual basis, does the institution determine what amount of net income before or after tax it wishes to |Yes |No |NA |

|risk on interest rate movements? | | | |

|Is the amount calculated above considered to be the EaR board limit? |Yes |No |NA |

| | | | |

|If different, please explain: | | | |

|Has management set an EaR management limit below the Board limit to account for margin variation outside of |Yes |No |NA |

|interest rate effects? (growth, pricing, competition, etc.) | | | |

|If during the year some extraordinary changes to forecasted net income occur, does management review its EaR |Yes |No |NA |

|limit? | | | |

|Part J – Economic Value at Risk (EVaR) |

|Has the credit union established upper and lower limits for the duration of capital that are considered |Yes |No |NA |

|prudent? | | | |

|Are the limits above based on documented analysis and reviewed annually? |Yes |No |NA |

|Is the term structure on non-term items such as chequing and savings accounts, as well as derivative positions |Yes |No |NA |

|included in the calculation of capital duration? | | | |

|In addition to testing for parallel shifts of the yield curve (e.g. +/- 1%), does the credit union perform |Yes |No |NA |

|other tests on the portfolio such as curve steepening or flattening situations and non-parallel shifts or using| | | |

|key rate duration analysis? | | | |

|Does management have regular monthly meetings to review EaR and EVaR and all the relevant issues with these |Yes |No |NA |

|measures? | | | |

| | | | |

|If not, how often? Give reasons why: | | | |

|Part K – Measuring IRR for the Purposes of Calculating Regulatory Capital |

|For the purposes of calculating risk weighted capital, is the institution required to use EaR to measure IRR |Yes |No |NA |

|exposure? (October 1, 2009 – DICO Guidance Note) | | | |

|For the purposes of calculating risk weighted capital, is the institution required to undertake a stressful |Yes |No |NA |

|parallel rate shock test to the portfolio for EaR? (October 1, 2009 – DICO Guidance Note) | | | |

|For the purposes of calculating risk weighted capital, is the institution required to use the negative impact |Yes |No |NA |

|on earnings for IRR exposure? | | | |

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