calculate the economic value of a savings account with no fixed maturity and an administered rate subject to change by bank management. That’s why institution-specific assumptions must be based on the unique characteristics of each bank. A robust, bank-specific “open/close” study is preferable for most banks. A cookie-cutter approach can give misleading results. Measuring interest rate risk involves tracking dynamic and complex relationships within a bank’s balance sheet. To do it properly, we must have good input, reasonable assumptions, and sound methodology. The calculation and monitoring of changes in the economic value of equity is an important part of the process. And in the final analysis, we cannot properly manage the financial risk of our bank without a clear understanding of the big picture. Jeffrey F. Caughron is a Senior Partner with The Baker Group LP. Caughron has worked in financial markets and the securities industry since 1985, always with an emphasis on banking, investments, and interest rate risk management. Contact Jeffrey at 800-937-2257 or jcaughron@GoBaker.com. So how do we calculate economic value of equity? Remember from the standard accounting relationship that “assets equal liabilities plus owner’s equity.” If we can calculate the fair market value of assets and liabilities, then we can simply back into the value of equity capital. Moreover, if we can project the changed value of assets and liabilities under different rate environments, we can measure projected changes in EVE as well. This is precisely what we do when we measure interest rate risk from the economic perspective. Monitoring changes in the economic value of equity is valuable in that it provides a comprehensive measurement of interest rate risk. It captures the effects of optionality and other important influences on value not contained in static accounting-type reports. The economic valuation method also reflects those sensitivities across the full maturity spectrum of the bank’s assets and liabilities. EVE relies on methodological and calculation assumptions, most notably the discount rate assumptions used to calculate the present value of assets and liabilities. It is relatively easy to calculate the market value of a bond with a fixed rate of interest and a fixed maturity. It is considerably more difficult and far less objective to More options for your customers, without more risk to your bank. Why Partner With Us? Ag Resource Management offers an innovative solution to lenders by mitigating your risks with watch list and nonperforming loans. We can help you take these assets off of your balance sheet and increase your lending ability. We achieve this with a blend of proprietary technology and data validation in valuing a growing crop, monitoring that crop, and keeping track of collateral as it approaches maturity. Loans are processed swiftly and we communicate with you throughout the process. We’re just a call away. Get started today with our teams in Kansas. Ryan Schreibvogel 1805 East Mary Street, Suite B Garden City, KS 67846 (620) 371-4858 RSchreibvogel@armlend.com Wade Simpson 5506 Corporate Drive, Suite 1760 Saint Joseph, MO 64507 (816) 226-4574 WSimpson@armlend.com ARM is an equal opportunity provider. Capital at risk, however, is an important point of focus for sound macromanagement, and it’s something that warrants a deeper understanding. Pub. 12 2023 Issue 1 35
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