North Dakota Administrative Code
Title 13 - Department of Financial Institutions
Article 13-03 - Credit Unions
Chapter 13-03-26 - Interest Rate Risk
Section 13-03-26-01 - Definitions

1. "Gap analysis" is a simple interest rate risk measurement method that reports the mismatch between rate sensitive assets and rate sensitive liabilities over a given time period. Gap can only suffice for simple balance sheets that primarily consist of short-term bullet type investments and non-mortgage-related assets.

2. "Income simulation" is an interest rate risk measurement method used to estimate earnings exposure to changes in interest rates. An income simulation analysis projects interest cashflows of all assets, liabilities, and off-balance sheet instruments in a credit union's portfolio to estimate future net interest income over a chosen time frame. Simulations typically include evaluations under a base-case scenario, and instantaneous parallel rate shocks, and may include alternate interest rate scenarios.

3. "Interest rate risk" means the risk that changes in market rates will adversely affect a credit union's net economic value or earnings or both. Interest rate risk generally arises from a mismatch between the timing of cashflows from fixed rate instruments, and interest rate resets of variable rate instruments, on either side of the balance sheet. As interest rates change, earnings or net economic value may decline.

4. "Net economic value" measures the effect of interest rates on the market value of net worth by calculating the present value of assets minus the present value of liabilities. This calculation measures the long-term interest rate risk in a credit union's balance sheet at a fixed point in time. By capturing the impact of interest rate changes on the value of all future cashflows, net economic value provides a comprehensive measurement of interest rate risk. Net economic value computations demonstrate the economic value of net worth under current interest rates and shocked interest rate scenarios.