c. myblog

September 3, 2015

Observations from ALM Model Validations: Cost of Funds Back Testing

In the course of working with hundreds of credit unions and performing A/LM model validations, one area of weakness we see is in assumptions related to the cost of funds. Quite often, the modeled cost of funds does not (without good reason) represent historical costs as rates rise. There are two major assumptions that influence […]

May 28, 2015

Betas – An Unintended Consequence of Simplifying Pricing Assumptions

Non-maturity deposits (NMDs) and their treatment in A/LM modeling is often a hot-button topic with examiners and management teams.  While there are key risk characteristics of NMDs not addressed with many methodologies (see previous blog entries below), the topic of this blog concerns NMD pricing assumptions. Blog:  Isolating Interest Rate Risk with a Static Balance […]

October 9, 2014

How is Your Modeling Positioned to Capture NCUA’s “Chief Concern”?

In the most recent NCUA Economic Update, John Worth (Chief Economist, NCUA) outlined NCUA’s chief concern regarding the impact of a changing rate environment, given an interpretation of recent Federal Reserve comments and data analysis. See below for a key quote from the video: “If the increase in short rates is larger than the increase […]

September 26, 2014

Isolating Interest Rate Risk with a Static Balance Sheet

Some will say that a static balance sheet income simulation achieves its objective of isolating interest rate risk by reducing the variables in the simulation. The question then is: What risk should be isolated? Interest rates change and cash flows do not change Interest rates change and cash flows change in response If the answer […]

September 11, 2014

Why Are My Income Simulation Results so Strong in a Shock?

In performing model validations for credit unions, we often see income simulation results that show significant improvement in net interest income (NII) and net income (NI) as rates rise, even for credit unions that have material positions in long-term, fixed-rate assets.  Why does this happen, and is it reasonable? Income simulations are commonly run with […]

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