Operations

Interest-Rate Risk: What Goes Down Must Come Up?

July 23, 2010
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Elements of sound risk management

Key elements of a sound risk management process include:

  • Understand and the assumptions used within the ALM process;
  • Ensure the analyses measuring interest-rate risk are accurate and presented in a timely manner;
  • Designate senior management responsibility for managing the credit union’s risk exposure;
  • Ensure that credit union personnel understand and communicate the resulting risk exposures to examiners and the board.

Risk management is a continuous process that identifying, measuring, monitoring, reporting, and controlling risk. ALM is integral to a credit union’s risk management process, as it facilitates the first four components of the process and enables the fifth component.

When properly tuned, an ALM model addresses the identification, measurement, monitoring, and reporting of interest-rate risk exposures. Credit union senior management is ultimately responsible for managing that risk.

For this reason, examiners want to ensure credit unions understand ALM and incorporate ALM results into their risk management and decision-making processes.

For larger credit unions, these functions may be performed in-house. However, for smaller credit unions, outsourcing the ALM function generally is a much more cost-effective solution.

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