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

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2. ALMOverview• Liquidity

– Liquidity Risk Management– Contingency Funding Plan

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2. ALMOverview• ALCO

– How Board Handles ALM Oversight– Made up of Senior Management & (sometimes)

BOD

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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

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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

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2. ALMOverview• ALM Model Validation

– Conceptual/Methodological Soundness– Ongoing Process Verification– Back-testing of Key Assumptions

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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

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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?

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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

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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?

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2. ALMAudit Scope• Assumptions

– Appropriate & Reasonable?– Properly Documented?– Periodically Updated as Needed?– Stress Tested?

• Talk with CFO

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2. ALMAudit Scope• Model Validation

– Obtain Independent Validation Certificate– Review Summary– Recent?

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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

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Questions

Thank You!