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Asset Liability Management (ALM) considerations include multiple aspects of full balance sheet management.
All models include default assumptions regarding re-pricing and the interest rate impact on net interest income and economic value of equity.
Associated renewal or re-pricing to a new rate, therefore, could have a similar impact as that of market rate changes on immediately re-pricing variable rate instruments.
FIs use various modeling techniques, primarily through purchased 3rd party software operated by the financial institution (FI) or outsourced to a 3rd party vendor of ALM/IRR services.
Moreover, IRR can also exist in level or unchanging market rate environments.Longer term assets and liabilities may have originated prior to the most recent change in market rates, but are now reaching a maturity or a delayed re-pricing interval.The first and most common is interest rate risk (IRR), which is the threat that a change in market interest rates may reduce net interest income and adversely affect the economic value of variable rate assets.Capital impairment can restrict future growth, as well as draw severe regulatory treatment.
Initial testing should include verification of data inputs (integrity of the data in the model compared to the FI’s General Ledger and other financial information).Tests will also be conducted for accuracy and/or reasonableness of the model’s calculations and results.