Posts

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NEV Shares At Par

Q: Does assuming NEV non-maturity deposits at par isolate changes in balance sheet structure?

A: No.

Some people think that valuing non-maturity deposits at par is more conservative and isolates changes in balance sheet structure simulation to simulation.  This is not the case.  NEV with non-maturity deposits at par shows exactly the same result whether 10% or 50% of the credit union’s structure is in money markets.  It also shows the same result regardless of whether these rates are 10 basis points or 210 basis points.  How can this type of analysis isolate changes in balance sheet structure when it ignores the deposit mix and deposit pricing?  Ignoring sources of risk cannot be considered conservative.

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Consumers Shunning Risk

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The question that many credit union leaders are asking themselves lately is, how far do we reach for yield?  With 10-year Treasury Rates rounding near 3% recently, how far can the balance sheet be pushed to make up for a squeezing margin?

Consumers at large are facing a similar dilemma when it comes to managing their own balance sheet.  How much risk is too much?  And with the world turning on its head, with perceived threats of war on the Korean Peninsula and dark concerns about the financial stability of European markets, that question is becoming harder to answer.  Even as consumer confidence is up on news of positive job forecasts, the Dow has tumbled below 10,000—not crossing that threshold since February 8th of this year (Dow Falls Under 10000 as Risk Is Shunned, WSJ, 5/25/10).

As the world continues to become more complex, and as ripples from the financial crisis and new developments in world affairs unfold, be mindful of consumers’ tendency toward safety.  While many credit union leaders cannot imagine another influx of low-cost funding, the perceived chaos in the world around the consumer could theoretically cause just that.  Consider stress testing what could happen if you experience another flight to safety of similar (as well as greater) magnitude combined with anemic loan demand to see the impact to your net worth ratio.  If net worth is at high risk of dropping below Well or Adequately Capitalized, identify viable steps you can take to be prepared.