Structure Risk Management

Topics: Asset, Interest, Derivative Pages: 51 (12219 words) Published: April 28, 2013
Structural Risk Management

(Asset/Liability Management) (ALM)

|Section |Topic |Page | |7000 |Executive Summary…………………………………………… | 7-2 | |7100 |Legislative Summary………………………………………….. | 7-3 | |7200 |Policy……………………………………………………………. | 7-5 | |7201 |Asset/Liability Management Philosophy…………………….. | 7-6 | |7202 |Balance Sheet Mix…………………………………………….. | 7-7 | |7203 |Managing Liabilities…………………………………………… | 7-9 | |7204 |Managing Assets………………………………………………. |7-13 | |7205 |Pricing…………………………………………………………… |7-14 | |7206 |Terms……………………………………………………………. |7-15 | |7207 |Interest Rate Risk……………………………………………… |7-16 | |7208 |Matching Maturities……………………………………………. |7-17 | |7209 |Foreign Currency Risk………………………………………… |7-18 | |7210 |Financial Derivatives…………………………………………... |7-19 | |7300 |Planning………………………………………………………… |7-21 | |7400 |Risk Measurement and Board Reporting…………………… |7-22 | |7401 |Mix and Yields…………………………………………………. |7-25 | |7402 |Growth………………………………………………………….. |7-26 | |7403 |Financial Margin……………………………………………….. |7-27 | |7404 |Interest Rate Risk Measurement…………………………….. |7-28 | |7405 |Monitoring Derivatives………………………………………… |7-35 | |7500 |Risk Management……………………………………………… |7-36 | |7501 |Reliance on Qualified and Competent Staff and Volunteers |7-37 | |7502 |Managing Interest Rate Risk… ……………………………… |7-38 |

Executive Summary

The goal of asset/liability management (ALM) is to properly manage the risk related to changes in interest rates, the mix of balance sheet assets and liabilities, the holding of foreign currencies, and the use of derivatives. These risks should be managed in a manner that contributes adequately to earnings and limits risk to the financial margin and member equity.

Proper management of asset/liability risk is facilitated through board approved policy, which sets limits on asset and liability mix, as well as the level of interest rate risk and foreign currency risk to which the credit union is willing to expose itself. Policy should also set out guidelines for the pricing, term and maturity of loans and deposits. The use of derivatives, if any, should also be controlled by policy, which should state among other things that derivatives must only be used to limit...
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