The NEV Trend in Running on Fumes

 

 

 

Credit unions are expected to manage Interest Rate Risk (IRR). However, the recommended NEV model has gassed out. Our recommendation is that CEOs now employ a simulation model (EAR) versus the NEV model. Here’s why.

 

Related web seminar on this topic:

Modeling Your Credit Unions Future

August 9 • 2017

11 am PT • 12 pm MT • 1 pm CT • 2 pm ET

Email djensen@tctrisk.com to register for this event.

 

NEV has serious weaknesses

Why? NEV applies a present value calculation against future cash flows. This model assumes a credit union is being acquired or liquidated. So are you closing up shop?

What was NEV designed for?

· Initially built for investments NOT for loans and deposits.

· To assist regulators when determining exposure/risk to the insurance fund.

What was NEV “not” designed for?

This model was not designed to manage interest rate risk over time or in a stable interest rate environment.What are the flaws of NEV?

· There are no maturities for non-maturity deposits. (NEV requires maturities)

· There is no established value for the purchase or sale of a checking or savings account. (NEV requires a value and a price)

Doing the math, it simply doesn’t add up.

NEV requires maturity, price and discount rate to run a present value. Because none of these numbers exist, you simply have to make them up.

 

“NEV proponents must have overlooked critical details, as a result, NEV crumbles like a house of cards.

- Sally Myers, CEO of C. Myers

 

How do we take the guesswork out?

The EAR model assumes your credit union will continue to operate. EAR takes out the guesswork because it relies on current financial performance.

What is EAR designed for?

· To simulate financial performance based on ACTUAL cash flows and operations.

· To run multiple simulations that measures the PRECISE effect of new products or operational changes on IRR.

EAR is in the spotlight

Many international financial experts encourage the EAR model.

“All institutions are encouraged to use earnings simulations [EAR]. Advances in technology have made simulation modeling more accessible for all institutions.”

Office of the Comptroller of the Currency

Interagency Advisory on Interest Rate Risk Management

 

What can you do?

Even if examiners request an NEV number; remember NEV can be dangerous and misleading. In this scenario, it is still important to utilize the EAR model as a long term IRR management strategy.

 

For this reason, TCT Risk Solutions now offers an NEV calculation as part of the Earnings at Risk Report for your convenience.

 

NEV has serious weaknesses

Why? NEV applies a present value calculation against future cash flows. This model assumes a credit union is being acquired or liquidated. So are you closing up shop?

What was NEV designed for?

· Initially built for investments NOT for loans and deposits.

· To assist regulators when determining exposure/risk to the insurance fund.

What was NEV “not” designed for?

This model was not designed to manage interest rate risk over time or in a stable interest rate environment.What are the flaws of NEV?

· There are no maturities for non-maturity deposits. (NEV requires maturities)

· There is no established value for the purchase or sale of a checking or savings account. (NEV requires a value and a price)

Doing the math, it simply doesn’t add up.

NEV requires maturity, price and discount rate to run a present value. Because none of these numbers exist, you simply have to make them up.

 

“NEV proponents must have overlooked critical details, as a result, NEV crumbles like a house of cards.

- Sally Myers, CEO of C. Myers

 

How do we take the guesswork out?

The EAR model assumes your credit union will continue to operate. EAR takes out the guesswork because it relies on current financial performance.

What is EAR designed for?

· To simulate financial performance based on ACTUAL cash flows and operations.

· To run multiple simulations that measures the PRECISE effect of new products or operational changes on IRR.

EAR is in the spotlight

Many international financial experts encourage the EAR model.

“All institutions are encouraged to use earnings simulations [EAR]. Advances in technology have made simulation modeling more accessible for all institutions.”

Office of the Comptroller of the Currency

Interagency Advisory on Interest Rate Risk Management

 

What can you do?

Even if examiners request an NEV number; remember NEV can be dangerous and misleading. In this scenario, it is still important to utilize the EAR model as a long term IRR management strategy.

 

For this reason, TCT Risk Solutions now offers an NEV calculation as part of the Earnings at Risk Report for your convenience.

 

 

Upcoming TCT Risk Solutions Web Seminars:

September 13 • How to Use Key Financial Indicators (KFI's)

October 11 • Expected Credit Loss Fundamentals

November 8 • Key Financial Indicators for Boards

 

 

 

 

 

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