Bank balance sheets were adversely affected in multiple ways by the speed and magnitude of the rising rate environment in 2022. Most noticeable was the effect on investment portfolios which experienced significant depreciation in market value, some to the point where capital became severely stressed and liquidity access was restricted. The problems had nothing to do with asset quality, poor lending practices or anything credit-related. It was entirely a function of the mathematics of rising interest rates. Even banks that owned nothing except U.S. Treasuries experienced heavy unrealized losses. This fact and the lessons learned point out the critical importance of reliable tools and sound processes for managing liquidity and interest rate risk. Asset/liability management (ALM) is the coordinated process of defining, measuring, and managing the financial risks faced by bank balance sheets, including price risk, liquidity risk, and interest rate risk. Interest rate risk specifically is the risk to earnings or capital arising from movements in interest rates. Bank managers most often focus on the risk to earnings and income rather than capital. Capital at risk, however, is an important point of focus for sound macromanagement, and it’s something that warrants a deeper understanding. Managing capital at risk involves the measurement of the economic value of equity or EVE. This concept gauges ALM IN 2023: Revisiting Economic Value of Equity (EVE) By Jeffrey F. Caughron, The Baker Group, LP 20 West Virginia Banker
RkJQdWJsaXNoZXIy MTg3NDExNQ==