BY EMILY HOLLIS
Wondering what the role of your new asset liability management board committee member is? Well, wonder no more. This overview of NCUA-defined responsibilities along with a “do and don’t” primer sets the record straight, no matter which type(s) of ALCO your credit union has established.
Asset liability management (ALM) has been usedwithin the credit union industry for many years but, initially, it was an internal process that did not involve board members. In the early 1990s, ALM only existed in the form of GAP. Assumptions were simple and GAP reports could be produced using Excel spreadsheets.
In the mid-1990s, corporate credit unions were required to conduct income simulation and net economic value analyses in accordance to part 704 of the NCUA rules and regulations. Today, NII and NEV tests are not included in the NCUA regulation for natural person credit unions, but they are detailed in NCUA examiner guidelines and most credit unions will be written up for noncompliance.
Today, ALM systems are extremely complex with stochastic modeling capabilities that can generate multiple types of duration calculations. Assumptions include prepayment forecasts, statistical measurements for non-maturing deposits and hundreds of market rates depending upon vintage, term, coupon, type, of loan.It can get very complicated.
ALM committee members will continue to be challenged as credit analyses become factored into the ALM process. Current Expected Credit Loss accounting (CECL) is on the horizon, which will further emphasize the need to project credit losses on credit union loans. The Dodd-Frank Stress Test (DFAST) has placed the limelight on credit analyses integrating into ALM. ALM providers are starting to project and incorporate these losses (and shocked losses given various scenarios) into the ALM function.