What are examiners asking management to do to validate the ALM model?
Validation is a useful training tool in setting ALM model assumptions. Because the accuracy of the ALM output results are mainly dependent on the assumptions entered into the model, validation is a critical part of the ALM process. It is important that these assumptions closely approximate the characteristics of your credit union. There are a variety of ways to validate your credit union’s ALM model. One method is to perform back-testing or post period comparison of the ALM model results to your credit union’s actual financial performance. Another method is to have an independent third party model validate your credit union’s ALM model. This is done by analyzing and reviewing your credit union’s ALM model assumptions and inputs for appropriateness, inconsistencies and conformance with past performance. The independent third party will probably use a different ALM model in its validation process.
