By Sean Doherty
We sometimes hear concerns from clients (and their regulators) of the impact a change in the mix of the deposit base might have on the earnings of an institution in a rising rate environment. "What would happen..." they ask, "...if we had a percentage of our non-maturing deposits shift back to a more traditional time deposit if rates were to increase 200 basis points?"
We have developed our "What-If?" tool to easily address this question, and others like it. This is an Excel workbook that we populate with the most recent results of a client's income simulation and market value of equity calculations, and allows for a quick 2 variable analysis. This approach handles most of the questions that tend to come up in the course of an ALCO or Strategic Planning meeting. More complex issues are handled with more detailed forecasting methods in the modeling process.
This process starts with a picture of the balance sheet as it looks currently....
We can then test a 10% reduction of MMDA Balances that get reallocated to Time Deposits at a new rate of 0.75% over the next 12 months, which is input into the "What If" Report like this:
Which results in changes to the Income Simulation and MVE calculations as follows:
And a Balance Sheet Change that looks like this (changes are in blue):
These types of mix and rate changes are easy to accomplish with this tool, and can be run as often as necessary. Since this is updated and sent to clients with every new data set, it is always current and ready to go. It is Fast, Easy, and Reliable...
If you are a client and are using this tool, let us know your thoughts as to how we might improve on this. If you would like to be a client and have access to this and many other tools we have developed to assist in the management of your balance sheet, call us, we would appreciate the opportunity to get to know you and your organization better.