ALM Validation

If your institution currently uses either a bond dealer sponsored, internal, or outsourced ALM solution, R2Metrics can perform various services to improve the model’s accuracy and ensure regulatory compliance of model assumptions.

 

Level 1:

• Validation of the primary Asset/Liability report information by comparing category balances for the ALM report to the Financial Institution’s general ledger.
• Compare bond portfolio market value sensitivity estimates to ALM report forecasts.
• Review all important assumptions underlying model results – including loan betas and applicable prepayment speeds, as well as deposit betas, decay rates, and early redemption methodology.
• Back test the primary Asset/Liability report by comparing projections of asset yields and liability costs to model forecasts from the previous year.
• Verify the Asset/Liability report’s compliance with the Financial Institution’s Asset/Liability Management Policy and review the Policy to ensure that it is in compliance with the latest regulatory statements.
• Review market valuation methodology used in the primary Asset/Liability model.
• Highlight potential modeling issues that may potentially impact overall model accuracy.

 

Level 2:

• Verify accuracy of the ALM report by running parallel R2Metrics ALM model and comparing asset yield, liability cost and net interest margin sensitivity forecasts under different interest rate shock scenarios, as well as changes in market value of equity. R2Metrics will provide a summary opinion letter with supporting tables detailing modeling discrepancies as well as the likely causes of these discrepancies and suggestions for corrective action.
• Review underlying integrity of ALM data used in the primary report, including detailing potential data weaknesses.