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Including Credit in Your Nev Tests: Testing for Capital Adequacy

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CFO CURRENCY : BY EMILY MORÉ HOLLIS, CFA, PARTNER, ALM FIRST FINANCIAL ADVISORS

Is your credit union approaching capital adequacy planning properly? Normal interest rate risk analyses may not be enough. A more sophisticated strategy will help your CU ascertain whether capital is adequate for the amount of interest rate risk being taken.

ALM analyses in the form of net economic value (NEV) have always been used to assess interest rate risk and, to a limited degree, credit. Truly understanding how credit losses impact capital and capital planning is imperative. More and more institutions are recognizing the benefits of incorporating credit impairment in NEV tests, thanks in part to an increase in regulatory scrutiny. Once implemented, stress tests can be performed by “stressing” the impairment through the application of multiples. Layer this with the normal interest rate risk analyses, and an institution can then assess its level of capital adequacy.

This content is for CU BUSINESS eMagazine , Special Deal: 2 websites , and NEW! The Leadership Team Builder Group Subscription members only.
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