but the key principles of risk management apply to interest rate risk, as they do to the management of other risks. these principles articulate the need for ( 1 ) appropriate corporate governance, including actively engaged boards of directors and senior managers ; ( 2 ) adequate policies, procedures, and limits to guide the institution ’ s interest rate risk management process ; ( 3 ) robust interest rate risk measurement and reporting systems that focus heavily on stress testing of both alternative interest rate scenarios and the effect of key behavioral assumptions on the results of such tests ; and ( 4 ) strong internal controls structured to ensure the integrity of all elements of the interest rate risk management process. as the recent crisis has emphasized, senior managers must actively engage in the measurement and assessment of risk exposures. given today ’ s technology, even some small banks are using reasonably sophisticated measurement techniques to assess the impact of different interest rate scenarios on the different types of interest rate risk that these institutions are exposed to. these risks include basic re - pricing mismatches that are most sensitive to changes in the level of rates ; exposures to different yield curve shifts, twists, and slopes ; basis risks, which arise from re - pricing differences in instruments with similar maturities ; and the risks that both explicit and embedded interest rate options can pose to the performance and safety and soundness of an institution. clearly, every financial institution, regardless of size, must understand the risks it is taking, and how to control and mitigate those risks. we have seen too well and too painfully in the past several years, in the largest banks and in the smallest, what happens when systems and management understanding are not commensurate with the risks being taken. the consequences fall not only on bank owners, staff, and customers, but potentially on the entire economy. we cannot allow that experience to be repeated, and this conference is one step in making sure that interest rate risk does not undermine the safety and soundness of our nation ’ s most important lenders – banks, thrifts, and credit unions.

loans – face challenges in acquiring good - quality short - and intermediate - duration assets to match their shorter - term liabilities. many community banks have increased their holdings of longer - term mortgage assets, including mortgage securities guaranteed by ginnie mae and the government - sponsored enterprises, in an effort to enhance both credit quality and earning asset yields. while such holdings advance public policy interests in reviving the mortgage market, they nevertheless pose the potential for increasing interest rate risk exposures, in part because of the embedded options in residential mortgages. additionally, some banks appear to be assuming more - complex exposures to interest rate risk through purchases of structured products. the recent crisis has focused attention on the problems and complexity of structured products in the form of collateralized debt obligations, which carved up the credit risk of underlying assets into various tranches – a product that, it turned out, too few investors understood. but similar lessons were learned with regard to interest rate risk management in the early 1990s when many institutions purchased various types of structured collateralized mortgage obligations ( cmos ) with embedded interest - rate options that were not fully understood – and then incurred substantial and unexpected losses when interest rates rose in 1994. many cmos turned out to have durations that fluctuated sharply in response to even small changes in market rates, resulting in significant declines in the value of the instruments and in many cases increasing the asset - liability mismatches they were intended to mitigate. capital losses as longer - term interest rates rise are a risk facing even asset - sensitive banks. as bankers prepare to meet the uncertainties that lie ahead, they must not forget these hard - learned lessons and must make sure they fully understand how the securities they purchase will perform in different economic and financial market environments, including an environment of rising short - and long - term interest rates. importance of robust interest rate risk management at all banking organizations because of the potential complexity of interest rate risk exposures at individual institutions, supervisors have, for many years, pointed out the need for bankers to use sound practices for managing these exposures. employing sound practices becomes even more critical in light of the current uncertainties surrounding the timing and impacts of changes in interest rates. it was concern about the risks to banks from interest rate changes that led the supervisors to issue the recent advisory on interest rate risk management. that advisory reminded institutions of guidance dating back to mid - 1990s. other speakers at this symposium will no doubt summarize and expand upon the guidance discussed in that advisory,