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NEV vs. 17-4 Gross Test

December 9, 2010

Don’t be confused.  The 17-4 Gross Test is not the same thing as net economic value (NEV).

NCUA describes the 17-4 as a “quick and dirty” interest rate risk measure.  It is calculated by devaluing fixed-rate mortgages by 17% and adjustable-rate mortgages by 4%.  These devaluation factors represent the price loss on newly issued loans.  Securities subject to FAS 115 are also included in the 17-4.

Why will the results of a 17-4 Gross Test be different from NEV?  Here are just a few reasons.

The 17-4 only values mortgages and securities subject to FAS 115.  It does not value consumer loans or non-FAS 115 investments, as NEV does.

Also, notice the assumption that the mortgages are newly issued.  This assumption is important in that it also means the loans are assumed to be at par in the base interest rate environment.  An NEV analysis will reflect an assumed gain or loss on the portfolio.  This means that even if the dollar change in a +300 rate environment, for example, is the same in NEV and the 17-4 test, the percentage change will be different because the denominator used is different.

As far as funding goes, the 17-4 does not value non-maturity deposits, certificates of deposit (CDs) or borrowings.  Occasionally, people will confuse the 17-4 with an NEV analysis that values shares at par.  This is not the case.  A shares at par NEV does value term deposits and borrowings, which for most places hurts their NEV results today because rates have dropped since many of their CDs and borrowings were booked.

The purpose of this post is not to come to the defense of NEV, but rather to clarify the differences between the 17-4 Gross Test and NEV.

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