How is economic value of equity (EVE) calculated?

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AcadiFi · Accepted Answer

EVE equals the present value of all banking-book asset cash flows minus the present value of all liability cash flows, with both valued at risk-free or OIS discount rates. Under a rate shock, both legs reprice; the change in EVE captures the capital impact. Practical calculation: schedule every contractual cash flow by tenor and currency, overlay behavioral assumptions for products without fixed maturity, discount with the relevant curve, and compare base-case EVE to shocked EVE. Example: a bank holds $1B in 30-year fixed mortgages yielding 4% funded by $1B in non-maturity deposits with an assumed 5-year effective duration. Base-case EVE at flat curves might be $120M. A 200 bp parallel up shock cuts the mortgage book PV by roughly duration * shock = 12 * 2% = 24%, or $240M, while the deposit liability PV falls by roughly 5 * 2% = 10%, or $100M. Net EVE change is -$140M. Critical subtleties: non-maturity deposits must be segmented into core (stable) and non-core (rate-sensitive) with separate runoff assumptions; pass-through assumptions govern how deposit rates move with market rates; equity itself is typically excluded from the EVE calculation; and optionality in caps, floors, prepayment rights, and early-withdrawal penalties must be valued using option-adjusted approaches, not static cash flows. EVE is a stock measure (point-in-time capital) distinct from NII sensitivity which is a flow measure (next year's earnings).

How is economic value of equity (EVE) calculated?

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