Posts

/by

Test Your Budget As Part Of Your A/LM Process

,
Wouldn’t it be nice to know if that “light at the end of the tunnel” is actually a fully loaded freight train coming straight at you?  Back in August, we wrote a blog with some tips on budgeting heading into 2013:  Budgeting Tips For 2013.  One of the points suggested evaluating the budget from an A/LM perspective.  This kind of analysis also falls within the guidance outlined in the NCUA Interest Rate Risk Policy and Program Requirements, where it emphasizes the importance of testing the interest rate risk impact of all business initiatives, new products, etc.

Testing the interest rate risk of a forecast will also connect the budget to any risk limits you might have.  Understanding the potential risks in advance can allow decision-makers to adjust budgeted objectives if necessary.  This is especially critical if results suggest that successful execution of the budget could result in the credit union being close to, or outside of, board approved risk limits.

This extra bit of due diligence is particularly important now given the continued low rate environment.  Remember:  the longer rates stay low, the more interest rate risk credit unions are likely to face.

/by

What Is Your Alternative To OTS For Prepayment Information?

With the OTS having been merged into the OCC, credit unions are looking for alternative sources for loan prepayment information to use when quantifying interest rate risk (IRR).  Unfortunately, there are a limited number of publicly available sources for this information.  The Securities Industry and Financial Markets Association (SIFMA) is one publicly available source that provides a “street consensus” for long-term prepayments based on surveying institutions such as UBS, JP Morgan Chase and Morgan Stanley.

As discussed in our recent post, How Do You Know Your Modeling Assumptions Are Right?, whichever source institutions decide to use, the assumptions should be stress tested and documented in order to understand them better—as well as satisfy the “reasonable and supportable” component of the new NCUA rule on interest rate risk management and policy.