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Strategic Plans And Quantifying Risk

July 27, 2012

In the recently issued Interest Rate Risk Questionnaire, the NCUA devoted an entire section to evaluating if decision-making is informed by interest rate risk measurement systems.  The guidance specifically references interest rate risk “what-if” testing in conjunction with strategic plans and operational decisions—and that “what-if” analysis outcomes should be documented within the strategic plan to either support or reject a decision.

The NCUA further states, “Whenever material changes in assets or liabilities are proposed, NCUA expects management to be proactive and perform what-if analysis before a new strategy is implemented.”  Understanding the potential impact that a strategic plan may have on the credit union’s risk exposures is key to effective asset/liability management.

In order to link strategic planning and desired long-term financial performance, decision-makers should ask themselves the following questions:

  1. How does this plan align with our long-term goals for financial performance?
  2. Is there a possibility that we will sacrifice financial performance in the short- or medium-term to fulfill long-term strategic and/or financial objectives?
  3. If everything goes according to our strategic plan, what will be the impact to the interest rate risk and credit risk exposure of the credit union?  Are there any other risks that may be present in the strategy that we don’t have today?  Specifically, how will those risks impact earnings and net worth levels?
  4. If external forces cause a deviation from our strategic plan, what contingencies are in place or what options do we have to get back on track?

A comprehensive strategic planning process incorporates the evaluation of interest rate risk.  Modeling the impact of strategic decisions beyond the traditional 1-year simulation is a must.

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