The asset/liability management reports and the insight they’ll provide are:
Income statements run under multiple rate environments over a two- or three-year time horizon
Running this report will allow you to see the impact on the interest margin and net income as the rate environments unravel over time. These rate environments need to include both immediate and permanent rate shocks, as well as gradual and non-parallel rate scenarios.
Forecast yield report
A forecast yield report will show how the yields on interest-bearing assets and liabilities move under the different rate movements. There would also be some other ratios running down to return on assets (ROA), so this would be helpful for showing the impacts of the rate changes.
Net interest income volatility
. This report will help your interest rate risk management. The results in this report will show comparisons of the net interest income under different rate environments. It will be clear where a potential issue might arise and under what type of rate shocks, allowing management to look at possible adjustments to help mitigate them.
Forecast ratio analysis
This report will show how different ratios, yields, and funding costs are performing over a scenario under a rate environment. The analysis is very helpful when running what-if scenarios changing the balance sheet mix or exploring the impact of different rate environments. The types of ratios included are:- profitability (net interest margin, non-interest margin, ROA, ROE)
- balance sheet (loans/assets, loans/deposits, and deposits/assets)
- capital ratios (book capital/assets, Tier 1 risk-based capital, Tier 1 leverage capital, and total risk-based capital)
Forecast income statement decision matrix
Much like the net interest income volatility report, this analysis runs the entire income statement under multiple rate environments to compare each account line. Also like that report, this one would help point out where issues might arise for interest rate risk management and under what kind of rate movement.Current market value
This report analyzing ALM data in your model takes your current position and runs a mark-to-market analysis of each account in the chart under immediate and permanent rates. It will show the value of each account with its current cash flows and interest rates vs. what the market is indicating the current rates are in the market; they are shocked up and down by the immediate and permanent rates selected. When complete, it shows the potential impact on the institution’s capital position in each environment. It will allow a bank or credit union to identify potential issues and provide an opportunity to adjust the business plan accordingly. Both the current market value and forecast market value can help in capital planning.
Forecast market value report
Running a forecast market value report allows you to see the impact of various influences over time. You would select an interest rate environment like a non-parallel rate change as described above, along with your business plan changes for the balance sheet and income statement over time -- out three months, six months, one year, or two years. Those impacts might include prepayment slowdowns or changing interest rates on certificates, loans, and non-maturity deposits. A forecast market value report can help management and the board see if strategy changes could benefit the institution. It is an excellent tool to run multiple strategies to see if the institution would perform better or worse, given the changes in the strategy.
This report takes your current position and business plan, then runs a liquidity coverage scenario using your available cash, investment securities, contingent secondary liquidity, and contingent liquidity uses. ALM liquidity reporting will help with your liquidity risk management. The report will give you a look at how your primary liquidity ratio and total liquidity ratio will change over time. For example, you can then run a stress test to show the potential impact on liquidity of higher deposits run-off, reduction of secondary funding, or a slowdown in loan prepayments.
As mentioned earlier, once you set up these reports in your ALM model, it’s easy to use them each month for asset and liability management. Your ALM advisors can help you if you need to know how to generate reports in the ALM model. With these reports, a financial institution will be better prepared to face the interest rate risk and liquidity risk that changing times can bring. It will be able to test strategies to see what adjustments could benefit the bank or credit union as the future continues to change. Do your competitors have that advantage?
