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N AVIGATING T HE F UTURE - ALM O F T OMORROW

N AVIGATING T HE F UTURE - ALM O F T OMORROW. T HE R OAD W E T RAVELED. Economy Failures Regulations ...Washington. C HANGES A BOUND. 2010 Interagency Advisory on Interest Rate Risk Management FAQ in 2011 2012 12 CFR Part 741 – Interest Rate Risk Policy & Program 2013

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N AVIGATING T HE F UTURE - ALM O F T OMORROW

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  1. NAVIGATING THE FUTURE -ALMOF TOMORROW

  2. THE ROAD WE TRAVELED Economy Failures Regulations ...Washington...

  3. CHANGES ABOUND • 2010 • Interagency Advisory on Interest Rate Risk Management • FAQ in 2011 • 2012 • 12 CFR Part 741 – Interest Rate Risk Policy & Program • 2013 • LTCU 2013-01 – Supervisory Focus

  4. CHANGES ABOUND

  5. THE EXPECTATIONS Build Capital Surge Deposits Manage Growth Member Satisfaction Concentration Risk Liquidity Risk Risk Mitigation Real Estate Loans Capital Adequacy Policies & Procedures Manage IRR Earnings Stability Mortgage Investments

  6. EXAMINERS Do they aim to make our life difficult? They just want to keep us safe…

  7. CREDIT UNION TRENDS Source: Call Report Data

  8. CREDIT UNION TRENDS Source: Call Report Data

  9. CREDIT UNION TRENDS Source: Call Report Data

  10. THE REGULATORY TREND • Credit Union’s need to take interest rate risk modeling seriously – FINANCIAL EXAMINERS • Understand ALM and IRR • Know your risk measurement methods • Be able to identify and interpret your risk positions • Be ready and willing to make risk-based management decisions

  11. RISK BASED DECISION MAKING RISK BASED DECISION MAKING PROCESS • Three Part Process • Identify & understand your risk exposure • Develop economic expectations • Determine the best strategy based on 1) risk exposure and 2) expectations

  12. RISK BASED DECISION MAKING 1) Analyze Risk and Identify Trends • IRR Exposure rising or falling • Drivers of risk • Changes to the balance sheet • Where did growth/contraction occur • Changes in interest rates • Rates rising or falling

  13. RISK BASED DECISION MAKING 2) Develop economic expectations • Key questions: • Is the economy growing or contracting • What is happening to…. • Unemployment • Consumer Confidence • Consumer Spending • Inflation

  14. RISK BASED DECISION MAKING 3) Choosing the best course of action • Look for balance – Evaluate investment and loan portfolios together, not separately • Goal is to manage risk, not to avoid it! • Items to consider: • Where are interest rates going • How is the balance sheet positioned • How do you want the balance sheet positioned • What products if added will achieve your desired goal

  15. IDENTIFY AND UNDERSTAND RISK EXPOSURE

  16. IDENTIFY AND UNDERSTAND RISK EXPOSURE

  17. IDENTIFY AND UNDERSTAND RISK EXPOSURE

  18. IDENTIFY AND UNDERSTAND RISK EXPOSURE

  19. IDENTIFY AND UNDERSTAND RISK EXPOSURE Risk exposure is viewed as High Risk driven by investment and real estate loan portfolios • Investments: 42% of assets; 57% of risk • RE loans: 19% of assets; 33% of risk • Combined: 61% of assets; 90% of risk Risk increased due to: • Deployment of ~$10 million of cash into investments and RE loans ($7.4mm into investments and $1.9mm into RE loans)

  20. ECONOMIC EXPECTATIONS • The Federal Reserve’s Plan • Current policy “at least through 2015” • Taper QE by year-end 2013…. • - Now possibly 2014…… • Look at raising rates when: • 1) Unemployment below 6.5% • 2) Inflation above 2.5% • Expect Fed Funds increase in late 2015 or early 2016

  21. ECONOMIC EXPECTATIONS Unemployment Rate Source: Saint Louis Federal Reserve

  22. ECONOMIC EXPECTATIONS Unemployment Rate Source: Saint Louis Federal Reserve

  23. ECONOMIC EXPECTATIONS Inflation – Trimmed Mean PCE Source: Dallas Federal Reserve

  24. ECONOMIC EXPECTATIONS +60BPS +~7 BPS

  25. ECONOMIC EXPECTATIONS Auto 1st Mtg

  26. ECONOMIC EXPECTATIONS

  27. IMPACT OF RECENT RATE INCREASE • Steepening of the yield curve has not helped credit unions • Mortgage rates moved higher • Consumer loan rates unchanged • Long-term risk increased • NEV Volatility increased • Intrinsic values declined • Prepayments slowed • Callables extended

  28. ECONOMIC EXPECTATIONS • • 2013-2014 Economic Expectations • Light to Moderate Growth • 2013 GDP expected to be near 2%; rising to around 2.5%-2.7% in 2014 • Inflation remains low; CPI expected to rise 2% for 2013 after an increase of 1.7% in 2012 • Unemployment to continue falling slightly through 2013….. Source: Kiplinger, BLS, Barclays LLC

  29. ECONOMIC EXPECTATIONS • Interest Rate Expectations • Continued steepening of the yield curve as the market awaits end of QE3 • Short-term rates to remain low into 2014 • Long-term interest rates to continue rising Source: Kiplinger, BLS, Barclays LLC

  30. CHOOSING THE BEST OPTION • Our Example: • Risk has increased due to growth in long-term first mortgages combined with increases in holdings of long-term fixed rate MBS • Rates likely to continue rising over the next 12-24 months with: • Long-term rates rising now • Short-term rates rising in 18-24 months

  31. CHOOSING THE BEST OPTION Big picture ALM goal: Be able to re-deploy assets in 12-24 months or have adjustable rate products that can roll up the curve while fixing funding costs Consider the following: • Auto loans • Indirect networks • Unsecured/credit card loans • Floating rate or S-T Inv. over L-T fixed • Limit extension risk • Shorter-term or balloon mortgages over long-term fixed mortgages • Limit extension risk • HELOCs • Term borrowings over term deposits

  32. GETTING READY FOR THE FUTURE • ALM and IRR is expected to remain at the regulatory forefront • Interest rate risk and concentration risk has been increasing in the credit union industry over the past few years • Credit Union’s will continue to be pushed towards incorporating ALM and IRR into the decision making process

  33. GETTING READY FOR THE FUTURE • Make Risk Based Decisions • Understand your risk • Identify trend in overall risk levels • Identify changes in the balance sheet • Isolate the key risk drivers • Identify changes in interest rates • Think about the future • Economic & interest rate expectations • Actively manage the balance sheet • Choose products that fit your balance sheet based on risk & return

  34. GETTING READY FOR THE FUTURE AND REMEMBER….. ….DOCUMENT EVERYTHING!!!!!!!

  35. QUESTIONS Mark DeBree, CFA Director – ALM Service 214-703-7873 mdebree@catalystcorp.org Asset Liability Management Service

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