Too Many ALM Risk Measurements


By Emily Hollis

In its guidelines for ALM examiners, the NCUA has opted in favor of five tests, which can sometimes be confusing and at times seemingly contradictory. This can lead to the quandary of which analysis to use and sometimes needless confrontation between examiners and credit unions. So, what do you do? There is a solution: just follow one measurement.

The five tests are shown above.

First of all, if you are still using a GAP analysis for risk measurement, it’s time to stop. It has been proven that repricing Gap ALM measurements are not meaningful.

The net interest income simulation (NII) simulation replicates earnings over a period of time; however, it does not capture cash flows beyond the initial horizon period of the simulation. Therefore, market value volatility of longer-term cash flows is not taken into consideration and, subsequently, its impact is not shown. Maximum rates that are embedded in loans and investments such as adjustable-rate mortgages (ARMs) may not affect income projections if the modeled scenarios do not generate interest rate paths higher than the contractual cap or level of rate restriction. Market value analysis captures the effects of embedded caps even when they are out of the money.

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