auditing asset liability management presented by: samuel ... 18 - session 2 alm-irr.pdfauditing...
TRANSCRIPT
Auditing Asset Liability ManagementPresented by:
Samuel Capuano, CBA, CRP, CLRO
10.1.18
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2. ALM Overview• ALM
– Asset Liability Management– ALM Committee (ALCO)– Interest Rate Risk (IRR)
– Net Interest Income (NII)– Net Economic Value (NEV)
– ALM Model
33
2. ALMOverview• Liquidity
– Liquidity Risk Management– Contingency Funding Plan
44
2. ALMOverview• ALCO
– How Board Handles ALM Oversight– Made up of Senior Management & (sometimes)
BOD
55
2. ALMOverview• Interest Rate Risk (IRR)
– The exposure of CU’s financial condition to adverse movements in interest rates
– Changes in interest rates affect Net Interest Income & Economic Value
66
2. ALMOverview• Net Interest Income (NII)
– The difference between revenue generated from CU’s assets and the expenses associated with paying out liabilities
– Used to quantify IRR– NII simulations:
– Generate insight into the impact of changes in market rates on earnings and guide RM decisions
– Provide a comprehensive way to stress plausible near-term earnings results.
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2. ALMOverview• Net Economic Value (NEV)
– The present value of assets - the present value of liabilities +/- the present value of expected CF’s on off-balance sheet items
– Quantifies the economic value of the entire balance sheet expressed as a single amount
– Simulates impacts for different rate scenarios
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2. ALM Overview• ALM Model
– Used for ALM Assumptions– Model can include:
– Projected B/S volumes– Prepayment rates for loans– Repricing sensitivity– Non-maturity deposit decay rates– Projected interest rates
99
2. ALMOverview• ALM Model Validation
– Conceptual/Methodological Soundness– Ongoing Process Verification– Back-testing of Key Assumptions
1010
2. ALMOverview• Liquidity Risk Management (LRM)
– LRM should:– Be sufficient to meet FI’s daily funding needs– Cover expected & unexpected deviations from the
norm
– Process should identify, measure, monitor and control liquidity risk
1111
2. ALMOverview• Contingency Funding Plan (CFP)
– Can be part of ALM Policy, or separate– Provides BOD-approved framework for managing
liquidity– Lists liquidity sources for adverse circumstances
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2. ALMRegulatory Guidance• 1996 Joint Statement on IRR• 2010 Interagency Statement on Funding & LRM• 2016 NCUA Revised IRR Supervision
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2. ALMRegulatory Guidance• 1996 Joint Statement on IRR
– Provides guidance on prudent IRR management principles
– BOD & Management Oversight Responsibilities– RM Process– Jan 2012 FAQ
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2. ALMRegulatory Guidance• 2010 Interagency Statement on Funding & LRM
– Provides guidance on sound practices for managing funding and liquidity risk
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2. ALMRegulatory Guidance• 2016 NCUA Revised IRR Supervision
– Instituted NCUA changes to review IRR– Revised Examiners Guide– IRR Review Procedures Workbook– 4 Categories of IRR risk
– Low, Medium, High, Extreme– Based on post-shock NEV ratios
– CU’s non-maturity share assumptions will be examined.
– How are assumptions developed?– Are they appropriate for the CU?
1616
2. ALMAudit Scope• ALM Policy Should Include:
– Duties & Responsibilities– ALM Identification System– System for monitoring & reporting risk exposures– Risk Limitations in:
– Up and Down Rate Scenarios– Minimum EVE/NVP ratio
– External Resources– Audit Policy
1717
2. ALMAudit Scope• ALCO Structure/Policy
– Appropriate Personnel– Board member?
– IRR Measurement Techniques– Meeting Frequency– Assumptions
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2. ALMAudit Scope• Input Validation
– Agree key figures from model to G/L, etc– Appropriate sources?
1919
2. ALMAudit Scope• Assumptions
– Appropriate & Reasonable?– Properly Documented?– Periodically Updated as Needed?– Stress Tested?
• Talk with CFO
2020
2. ALMAudit Scope• Model Validation
– Obtain Independent Validation Certificate– Review Summary– Recent?
2121
2. ALMAudit Scope• Model Reports
– Review for Clarity & Adequacy– Provided to Sr. Management/ALCO/BOD?– Determine Back-testing Adequacy
– Model Estimates to Actual Results– Quarterly– 90 & 360 day lookbacks
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2. ALMAudit Scope• Liquidity Policy
– LRM Guidance– LRM Measures– Funding Concentrations– CFP
– Comprehensive & Board Approved– Liquidity Crisis– Early Warning Signs– Appropriate Diverse Mix of Funding Sources– Clearly ID Responsible Personnel– Specify Nature & Frequency of Reporting
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2. ALMAudit Scope• Liquidity Reporting
– Review of Measurement Monitoring– Liquidity Position Stress Test– Annual Testing/Usage of Contingency Lines
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2. ALMAudit Scope• Liquidity Monitoring
– Identify Stress Events– Assess Levels of Severity & Timing– Assess Funding Sources & Needs– Identify Potential Funding Sources– Establish Liquidity Event Management Processes– Establish a Monitoring Framework for Contingent
Events
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2. ALMCommon Findings• Non-comprehensive CFP• Limited Back-testing (ie only 90 day lookback)• Back test results not reported• CF Analysis too limited• Policy exceptions not properly explained• Non-detailed minutes• Lack of Board involvement• Non-testing of unused borrowing lines
Thank You!