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A/LM MODELING: NEV and NII Assumptions: Things to Consider

January 30, 2014

Market interest rates have been sitting at or near record low levels for almost five years. As a result, credit unions are booking assets at very low rates and, in many cases, lengthening their balance sheet to slow the decline in yield. From a business perspective, it makes sense for credit unions to be especially focused on their asset/liability management (A/LM) position and their understanding of risk.

In addition, the added level of interest rate risk undertaken by some institutions has not gone unnoticed from a regulatory perspective. The NCUA and state regulators have become increasingly concerned about the composition of credit union balance sheets. Interest rate risk is the most significant risk the industry faces right now, according to NCUA’s Letter to Credit Unions 14-CU-02 (Supervisory Focus for 2014). Higher levels of interest rate risk, along with increased focus, put more pressure on understanding model methodologies and assumptions.

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