Preparing for ALM Exams · 2019-06-12 · “Preparing for ALM Exams” discussed in this...
Transcript of Preparing for ALM Exams · 2019-06-12 · “Preparing for ALM Exams” discussed in this...
Preparing for ALM ExamsMelissa R. Scott
VP, ALM Services
Vizo Financial l Copyright © 2019 l All Rights Reserved
DisclaimerThe information contained herein has been prepared for general informational purposes only and is not offered as and does not constitute legal advice or legal opinions. You should not act or rely on any information contained herein without
first seeking the advice of your legal counsel.
No copy or use of this presentation should occur without the permission of Vizo Financial. Vizo Financial retains all intellectual property interests associated with
this presentation. Vizo Financial makes no claim, promise, or guarantee of any kind about the accuracy, completeness, or adequacy of the content of the presentation
and expressly disclaims liability for errors and omissions in such content.
“Preparing for ALM Exams” discussed in this presentation is the current version with effective date of June 3, 2019.
The comments today are my own and not necessarily those of Vizo Financial or the Vizo Financial membership.
Policy
Read through policy
Identify areas for change/review
Policy
BRING UPDATES TO THE ALCO AND BOD
NOTE APPROVAL IN POLICY NOTE DISCUSSION AND CHANGES IN MINUTES.
COMMUNICATION AND DOCUMENTATION IS KEY.
EXAMINERS ARE LOOKING TO THE MINUTES TO ENSURE
ITEMS ARE DOCUMENTED.
Policy
Policy Review and
Approve
Liquidity Stress Test
Policy
Non-maturity
Stress Test
Assumption Review
Simulate new loan
promotion
Report parameters
INSTANTANEOUS OR LAG
SHOCK OR RAMP
PARALLEL OR NON-PARALLEL
Policy Limits
Minimum: +/- 300 bps *rate shock * static balance sheetNEV Sensitivity % ChangeNEV Ratio MinimumNII Sensitivity % Change
Additional considerations
NIM ROACapital
Policy Limits
Typical Policy Limit for NII -20%Does your board know what this means?State it as a dollar amount:
Current base case (flat rate) Net interest income $1.0 million
20% decline in NII policy limit -0.2 million
Net Interest Income in + 300 shock 0.8 million
ALCO Meeting
• Current product pricing• Financials• ALM Reporting
• Current Trends• Compliance
• Liquidity Reporting• Quarterly Stress Test
• What if scenarios• Budget
• New products• Liquidity Stress
All Meetings As Needed/Scheduled
Note items in the minutes. Pay attention to both regular reports and stress tests compliance limits.
Assumption Review
Review data files
Betas (Sensitivity)
Prepayments
Reinvestment Rates
Reinvestment Terms
Adjustable Framework
Growth
Assumption Review-Data Files
KNOW THE INFORMATION FROM YOUR DATA
KNOW WHAT IS BEING ADDED IN TO MODEL
Assumption Review - Betas
Betas reflect current
repricing behavior?
Valid caps and
floors?
+3 00 2.50%
+3 00 1.75%
+3 00 1.00%
+2 00 1.75%+2 00
1.25%
+2 00 0.75%
Assumption Review- Betas Understand the Impact
25
+1000.50%
50 75
+1000.75%
+1001.00%
Rate 0.25%
Assumption Review-Prepayments
Identify products with prepayments
Internal Source
When was it last updated
Correct in the model
External Source
When was it last updated
Is it reasonable
Assumption Review- Rates
Fixed/Adj products correct?
Adjustable attributes
valid or have product
structures changed?
Rates represent
current market?
GrowthStatic - Regulatory Dynamic - Manage
New Business
Shifts in balance sheet concentration
Participations
New products
Annual Stress Test
Non-Maturity Prepayments
Yield Curve Share Mix
Stress Scenario-Out of Policy
Validation
Purpose to make your assumptions and modeling more reliable for business decisions
Establish board approved frequency
Recommend 2-3 years or at board’s discretion
Back Testing RatesBalance sheet
Indirect Fees
PremiumDiscount
Servicing Fees
Purpose: To uncoverdiscrepanciesin the model
• Volume = (Difference in Actual vs. Projected Average Balance) * Actual Annualized Yield/ Annualization Factor
• Rate = (Difference in Actual vs. Projected Annualized Yield)/ Annualization Factor*Actual Average Balance
• Mix = (Difference in Actual vs. Projected Average Balance)* (Difference in Actual vs. Projected Annualized Yield)/ Annualization Factor
• Total Variance = Volume + Rate + Mix
• Variance % = Total Variance / Actual Interest Income
Nov 2018-Jan 2019 Actual Compared to Model Forecast October 2018
Base Case - Static Rates
Nov 2018-Jan 2019
Nov 2018-Jan 2019
Projected
Dynamic
12 month
Sources and Uses
Report
Share Deposits
Borrowing
Non-Member Deposits Brokered
Deposits
Loan Sales
Cash on Deposit
Inv. Sales
Inv. Maturity/
Repayment
Loan Principal Payments
Fee Income
Interest Income
Share With-
drawals
Loans Granted
Inv. Purchased
Paydown of
Borrowing
Fixed Assets
Purchased
Operating Expenses
Loans Purchased
Dividends
Sources and Uses of Funds
https://publishedguides.ncua.gov/examiner/Pages/Content/ExaminersGuide/Liquidity/CashFlows-Identify.htm
Primary
Cash and depositsCertificates of Deposit
and Unencumbered Investments with maturities not exceeding 90 daysCash inflow from loans
and investmentsCore Deposits
Secondary
Sale of investments classified as Available for SaleSell of loans or
participations in secondary marketCertificate of deposit
promotionsLine of credit with
CorporatesFHLB AdvancesBrokered Deposits
Emergency
Federal Reserve Discount WindowCentral Liquidity Facility
Liquidity Stress Testing
https://www.ncua.gov/newsroom/ncua-report/2016/margins-shrinking-effective-liquidity-management-critical
Loans
Liquidity Stress Testing
Shares
Stress Test – Option 1
* Based on NCUA Report July 2017
Stress Test – Option 2
Stress Test
Loan growth& Share decline
Modifying prepayment
speeds
Events limiting
contingent funding sources
* Based on NCUA Report July 2017
1st Quarter 2nd QuarterStatic Processing Static Processing
Policy Compliance Policy ComplianceDynamic Processing Dynamic ProcessingLiquidity Reporting Liquidity ReportingReview Policy Liquidity Stress Test
Note discussion and changes in the minutes Yield Curve Stress TestNote approval of the policy Assumption Review
Prepayment Stress Test Note discussion and changes in the minutesUpdate Prepayment Calculations Note approval of the policy
3rd Quarter 4th QuarterStatic Processing Static Processing
Policy Compliance Policy ComplianceDynamic Processing Dynamic ProcessingLiquidity Reporting Liquidity ReportingBack Test BudgetShare Mix Stress Test Non Maturity Stress TestUpdate approved assumption changes in the model Evaluate Validation schedule
As NeededSimulate significant new business lines or balance sheet shiftsAdd a liquidity Stress Test of liquidity becomes tight
ALM Annual Schedule
Resources
Prepayments
Back Test Template
ALM Annual Schedule