ALM Assumptions for Credit Unions: Strategies to Thrive Amidst Market Volatility

In recent years, credit unions have grown accustomed to the regular occurrence of market volatility and its effects. Surging deposits and liquidity surpluses were widespread with rates at historically low levels, only to go the other way sooner than most expected. Now, rates are at the highest they have been in years and credit unions are facing a shortage of liquidity on top of continued strength in loan demand.

All this volatility has wreaked havoc on credit union ALM (Asset/ & Liability Management) ratios. It is important to understand what drives these ratios and how to model the balance sheet for accurate risk assessments and income forecast. This is a great opportunity to take a closer look at ALM assumptions to have answers ready for discussions with examiners and auditors.

Non-maturity deposit assumptions are a way to offset interest rate risk by assigning value to those shares based upon historical performance. With rate shock results frequently pushing against or exceeding limits, understanding these assumptions could facilitate a more comfortable conversation.

Betas measure the expected move in rates for an instrument relative to the movement in an underlying rate index. Betas can impact rate shock results and forecasts significantly, and now is a good time to review them to ensure accuracy and appropriateness for your credit union’s current balance sheet.

Running liquidity stress scenarios is very important in the current environment for understanding your credit union’s liquidity risk position, and at the top of many regulator’s lists. Moreover, a course of action is necessary for when liquidity stress results look unfavorable or if short-term needs arise. Having a contingency funding plan documented and being familiar with the first steps that would be taken is a great way to stay out in front of the issue. While specifics may differ due to market pricing changes, knowing your options is important.

Those are just a few of the top ALM assumptions to refamiliarize yourself with, if necessary, as we move forward with 2023 and into next year. Understanding the risks market volatility brings could help prepare for exams and audits should those questions arise.

For further assessment and information on liquidity solutions, contact AIM CU Solutions or check out the Millennium Corporate website!