• Appropriate board and senior management oversight;
• Adequate risk management policies and procedures;
• Appropriate risk measurement, monitoring and control functions; and
• Comprehensive internal controls and independent audits.

2. The specific manner in which a bank applies these elements in managing its interest rate risk will depend upon the complexity and nature of its holdings and activities as well as on the level of interest rate risk exposure. What constitutes adequate interest rate risk management practices can therefore vary considerably. For example, less complex banks whose senior managers are actively involved in the details of day-to-day operations may be able to rely on relatively basic interest rate risk management processes. However, other organisations that have more complex and wide-ranging activities are likely to require more elaborate and formal interest rate risk management processes, to address their broad range of financial activities and to provide senior management with the information they need to monitor and direct day-to-day activities. Moreover, the more complex interest rate risk management processes employed at such banks require adequate internal controls that include audits or other appropriate oversight mechanisms to ensure the integrity of the information used by senior officials in overseeing compliance with policies and limits. The duties of the individuals involved in the risk measurement, monitoring and control functions must be sufficiently separate and independent from the business decision makers and position takers to ensure the avoidance of conflicts of interest.

3. As with other risk factor categories, the Committee believes that interest rate risk should be monitored on a consolidated, comprehensive basis, to include interest rate exposures in subsidiaries. At the same time, however, institutions should fully recognise any legal distinctions and possible obstacles to cash flow movements among affiliates and adjust their risk management process accordingly. While consolidation may provides a comprehensive measure in respect of interest rate risk, it may also underestimate risk when positions in one affiliate are used to offset positions in another affiliate. This is because a conventional accounting consolidation may allow theoretical offsets between such positions from which a bank may not in practice be able to benefit because of legal or operational constraints. Management should recognise the potential for consolidated measures to understate risks in such circumstances.