Hi. I am Howard Lothrop host of Echo Partners
TV and I want to talk with you about problems… asset liability problems. I see them all the
time. Clients come to me because there’s something not quite right with the gap report or a problem
with earnings at risk or the EVE looks to be a little outlandish. So here’s the question.
If you have interest rate risk problems, and by problems, I mean anything where your interest
rate sensitivities are larger than you would like them to be, what is the easiest asset
liability problem to solve? The answer here I think is really going to surprise you. The
answer is EVE. If you have a long-term interest rate risk problems shown by your economic
value of equity report those are actually the problems that are the easiest to solve.
Now, why is that? Well it’s because of the long-term nature of the report itself. First
of all the long-term nature of the EVE gives it a more leveraged result so you have bigger
percentage swings for rate movements. So it’s more apt to throw off, indicators of interest
rate risk and balance. But secondly and most importantly remember that these interest rate
risk measures assume that there is no change in strategy or change in bank management techniques
and this is precisely why you are the top manager at the bank. For times like this where
you need to make the decisions to change your interest rate risk profile. And here’s the
good news. Small changes made today in response to an EVE report that suggests long-term interest
rate risk are quickly quickly picked up and they are compounded throughout the EVE process.
So, actually those most threatening changes of all those big percentage number EVE changes
are the simplest problems to solve. We’ll see you on the next episode