Looking Backwards to Look Forward
- DCG
- Jun 15
- 2 min read
The DCG advisory consulting team starts every week with an internal discussion of market trends, regulatory developments, and the real experiences of our bank and credit union clients. Here are the notes from this week’s Monday Morning Meeting.
Check out the meeting notes from previous weeks.
Do you have a question?
This morning’s meeting was a spirited debate on incorporating NII simulations that highlight the impact of yield curve risk.
Traditional ‘benchmark’ parallel yield curve shifting scenarios with ‘static’ models will always have their place and provide meaningful information and trends to be able to see over time.
Nonetheless, the last 20+ years have demonstrated that interest rates rarely move in parallel fashion and the world is anything but static. As such, non-parallel rate scenarios (flattening, steepening, and even inverted) are a critical piece of the ALM puzzle to help institutions triangulate their potential exposure. In addition, dynamic assumptions (non-linear pricing betas and average lives, as well as forecasted analyses impacting loan and deposit volumes) will help identify potential exposures in advance.
Short-term rates rose 525bps over 18 months in 2022/2023. The yield curve inverted meaningfully, deposit customers that had been ‘asleep’ for the better part of two decades suddenly were very rate sensitive, while borrowers extended into long-term fixed rate products at very low rates. Not all institutions modeled these scenarios/behaviors in advance of 2022. No model will ever be perfect. However, learning from past cycles, understanding the importance of scenario design, as well as the drivers of earning performance will help to avoid potential blind spots in ALCO analysis.
Incorporating a dynamic assumptions process and non-standard yield curve simulations will help identify potential exposures and lead to better conversations and strategic implementation going forward.
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