Insights from Catalyst

At one time or another, you’ve probably heard the term “backtesting” from your auditors or ALM provider. Backtesting is simply the comparison of your actual income statement to your projected income statement. This technique can provide valuable insights into the accuracy and reasonableness of your interest rate risk model.

The concept of working from home was foreign to many until March 11, 2020, when the World Health Organization officially declared the COVID-19 outbreak a pandemic. Nine months later, what was once a culture shock has slowly become “normal." However, working from home comes with its own set of risks. For this reason, it’s important credit unions recognize – and account for – these various types of risks.

You’ve likely seen articles predicting that mortgage rates will rise in 2021. The rationale for these predictions is complex, but when I think about the direction of mortgage rates, there is really only one major factor I consider: economic growth. However, for mortgage rates to increase, one final variable must be realized: the 10-year Treasury yield needs to rise above one percent and remain within a range of 1.33-1.60 percent.

The year 2020 has been like no other, and the financial services industry – like most – has felt its share of turmoil during the COVID-19 pandemic. Credit unions have endured a nationwide lockdown, modified branch activity and accelerated timelines for digital solutions and online banking. Over the last eight months, two major economic byproducts have also emerged: 1) deposit/share growth and 2) record low interest rates.

Asset liability management (ALM) can be somewhat daunting. You may be wondering, “What is the best way to allocate the balance sheet to minimize risk and optimize earnings?” To fully grasp ALM, you need an understanding of different types of risk and how the balance sheet composition affects those risk levels. With the holiday season fast approaching, it may be helpful to compare risk assessment tools to a Thanksgiving feast.