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Heiko Baerschneider

I cannot agree with the thesis that EaR is only a short term view. One can easily calculate the EaR over the whole maturity spectrum. The question is how assets which are hold to maturity behave in relation to trading products. The root of the two paradigmas Econcomic Value and Accounting value is here. Thus, one can not say this is better than the other. It os the purpose which determines which methodology to use.

Brad Olson

Interesting comment. I’m not at all surprised to hear that someone disagrees; in fact I’ve seen many discussions about Interest Rate Risk disintegrate into arguments about the “right” and “wrong” way to measure something.

I certainly agree that which measurement to use (Earnings-at-risk vs. EVE at risk) depends on the situation. I just happen to think that earnings-at-risk is better suited to measure short-term interest rate risk (exposure within one year).

I don’t agree that one can “easily” calculate EaR over the whole maturity spectrum. EaR usually involves creating a forecast that includes some sort of new dollar volumes on both sides of the balance sheet. Typically community banks use a level balance sheet forecast, a budget, or a strategic plan. Maybe I’m a skeptic, but I don’t buy into volume forecasts that are much farther out than two or three years, let alone “over the whole maturity spectrum”. Once you get that far out forecasts are a bit…well…“far-out”.

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