{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Nev analysis to minimize interest rate risk examiners

Info iconThis preview shows pages 10–12. Sign up to view the full content.

View Full Document Right Arrow Icon
NEV analysis To minimize interest rate risk, examiners have recently emphasized the idea of Net Economic Valuation, which is a form of duration analysis. The credit union is required to analyze the effects of changes in interest rates on the value of its assets. liabilities and net worth. Net Economic Valuation asks, how does the value of the institution change with changes in interest rates? Suppose that interest rates decrease by 100, 200 or 300 basis points, or increase by 100, 200 or 300 basis points. What is the effect on the net economic value (net worth) of the institution? A hypothetical NEV analysis is presented below. 102
Background image of page 10

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Econ 350 U.S. Financial Systems, Markets and Institutions Class 10 Figure 10-1 A hypothetical NEV analysis net economic value NEV -300 -200 -100 0 +100 +200 +300 \ change in interest rate (basis points) In this example, the current net economic value of the institution is at 0 change in interest rates. NEV analysis shows the effects on the net economic value when interest rates increase or decrease. Here the institution faces little interest rate risk, since either increases or decreases in interest rates will increase the net economic value of the bank. CAMELS rankings Regardless of the recent trends in bank supervision, overriding the entire examination process is the concept of CAMELS rankings. In the New York Fed’s money museum stands a giant stuffed camel. Its purpose is to illustrate the idea of CAMELS rankings, the system used to evaluate and compare the safety and soundness of banks. CAMELS represents the functional areas where banks are regulated. It stands for: C – capital adequacy A – asset quality M – management E – earnings L – liquidity S – sensitivity to interest rate risk Each category is ranked from 1 – 5, with 1 being the highest, and then the bank is given an overall ranking of 1 – 5. While the CAMELS rankings are kept secret to avoid undue influence on consumers, they do have important implications on the degree of regulatory scrutiny. For example, banks with rankings of 1 and 2 are only examined once a year, while those with a 3 or 4 ranking are examined twice a year. Those with a 5 will be shut down if they are unable to improve their ranking. Also certain regulations only apply to those institutions with inferior CAMELS rankings. 103
Background image of page 11
Econ 350 U.S. Financial Systems, Markets and Institutions Class 10 Since the credit crisis of 2008, the most recent trend in bank examination has been vendor analysis. The bank is now required to analyze and report on the risks of vendor failure, and how the failure of a vendor would affect the institution. This reflects the greater concern over systemic risk since the 2008 financial collapse. For example, the company that processes a bank’s credit cards is more important than the company that plows the parking lot when it snows. A bank is required to provide more scrutiny over its critical vendors. That’s plenty for today. I hope I was able to share some of my experiences from working on the board of a credit union to help you understand banking management and regulation. In the next class we will explore the history of banking regulation, and how it has affected the financial structure we see today. 104
Background image of page 12
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page10 / 12

NEV analysis To minimize interest rate risk examiners have...

This preview shows document pages 10 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon bookmark
Ask a homework question - tutors are online