Key Business Questions
When credit unions evaluate changes in strategy or financial structure, the focus from an A/LM perspective is often on valuation and net interest margin. However, these traditional approaches to measuring risk will not answer several critical business questions. Consider, does NEV or net interest income analysis allow a credit union to see:
- Under what rate environments could the decisions we have made and implemented cause us to have materially reduced or negative earnings?
- Under what rate environments could our existing business cause us to no longer be Well Capitalized from interest rate risk? How does the answer change as other risks are aggregated?
- What does our new business need to earn going forward in order to achieve our net worth and asset size goals and offset existing risks?
Key components of risk will be missed in the analysis process if there is not a consistent focus on understanding long-term, bottom-line profitability, as well as incorporating the aggregation of other unexpected events. Remember your credit union only puts net worth dollars at risk through bottom-line negative earnings. Do your A/LM tools allow you to see when negative earnings could occur, and when they do, what the magnitude could be? If not, consider what risks might be missing.
