Examiners determine the total amount of assets with final maturities or terms 5 years or longer and divide this number by total assets. Although there is a lack of consistency in the application of this ratio, the numerator usually includes all fixed-rate mortgage loans, ARMs that reprice in 5 years or longer and fixed-rate investments with maturities 5 years or longer. When this ratio exceeds 25%, this is presumably a “red flag” that indicates the possible presence of interest rate risk. There are several problems with this ratio. First, it is a very simplistic approach to a complex issue. It focuses only on the longer-term assets with no attention given to risk-reducing aspects of the balance sheet such as HELOCs, ARMs, a short-term investment portfolio, share drafts, certificates and capital. Another problem is that there is no empirical support or justification for the 25% figure. In other words, it is an arbitrary number. Despite official NCUA statements to the contrary, in the eyes of some examiners and in many ALM policies, the 25% figure has become a de facto limit on mortgage loans as a percent of assets. Rather than using an arbitrary limit, the ALM modeling process—which encompasses the entire balance sheet--should determine the limit on fixed-rate mortgage loans and other longer term assets