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Asset-Liability Management: Theory, Practice, Implementation, and the Role of Judgment

Asset-Liability Management: Theory, Practice, Implementation, and the Role of Judgment

This research asks the questions: Which interest rate risk models should credit unions consider in the face of an uncertain interest rate environment? Which asset/liability management factors and responses should be written into policy and which should not? 

Evaluating interest rate risk (IRR) will remain a chief priority for credit union executives, especially when enforcing an effective asset-liability management (ALM) policy. Credit unions should identify pressing IRR issues and implement solutions that will allow them to withstand volatility related to periods of rapidly rising interest rates. When the S&L industry ran into jackknifing interest rates in the late 1970s and early 1980s, its fixed-rate mortgage-heavy balance sheet was ill prepared. Coming out of a different recession, credit unions are in a much better structural position to weather the coming rise in interest rates, with only 25% of assets hitched to long-term mortgages, and a much healthier mix. DIfferent perspectives and risk tolerances between credit union practitioners and credit union examiners mean that both groups take different approaches to analysis and policy. This report makes it quite clear that there is a need for effective IRR management and building in a margin of safety in the ALM modeling process. 

Categorized: 'Policy'

Tagged: 'asset management' 'liability management' 'interest rates' 'risk' 'economic challenges' 'public policy'

Comments on this Report

Thanks Doug—We hope it pinpoints some of the thorns, even if it can’t take them away.

Appreciate Filene tackling this subject matter.  Sharing with our Credit Union’s ALM team.

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