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The Hidden Interest Rate Risk in Your Balance Sheet

ALM modeling helps to understand the impacts of different interest rate environments on profitability and capital. While consistent and careful review of these reports is critical to strategy, it is doubly so when interest rate moves are anticipated.

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Modeling Betas and Expected Maturities

Non-Maturity Deposit Accounts are your primary source of funding, but they do not have contractual maturies or repricing schedules. To appropriately assess the interest rate risk of the balance sheet, assumptions must be made as to the rate sensitivity (betas) and expected maturity (WAL/decay rates) of these funds. 

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Measuring Interest Rate Risk: NEV

NEV is one of two measurements that ALM modeling uses to assess your interest rate risk. NEV stands for net economic value and is sometimes referred to as the economic value of capital at risk. NII represents net interest income, sometimes referred to as the income simulation. In this article, we’ll define NEV and discuss examples of how to read the measurements.

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Understanding Interest Rate Risk

ALM modeling is used to gain insight into the potential impacts of changing interest rate environments on both the credit union’s equity or capital as well as its profitability or ability to generate earnings. In short, ALM modeling is for measuring interest rate risk.

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Measuring Interest Rate Risk: NII

NII is another measurement that ALM modeling uses to assess your interest rate risk. Net Interest Income (NII) is a bit easier to understand than its counterpart, NEV, because the timescale is defined.

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