The modeling process and results

The Asset Liability Management (ALM) model repricing process should examine the relationship between the current rates paid and their typical reference rates as well as the expected impact of that repricing on the different categories of deposits. For example, further Federal Reserve rate increases would be expected to generate larger changes in Certificates of Deposit (CD) rates than MMDA rates, which in turn would move more than NOW rates. This process would be expected to eventually return pricing spreads to long-term equilibrium levels. But when constructing the repricing model, it is critical to be aware of factors that would impact the estimated betas and potentially generate different betas and different equilibrium spreads. This process implies a conservative approach to modeling and implementing rate changes when current conditions do not reflect typical historical values. Lags in the rate adjustment process are a common feature at all times but are even more important when other factors may have an outsized impact on market rates. Currently, $1.5 trillion in excess reserves may be the most important additional factor you should consider, but expected inflation, greater loan demand, changing competitors’ behavior and technological advances are other potentially important influences.

Rate repricing will rely on institution-based data

Financial institutions generally will have monthly historical data on deposit pricing and deposit balances readily available. Those data provide an excellent starting point for developing an institution-specific model for deposit repricing and the resulting deposit behavior. But to fully understand what is going on with deposit balances, you should delve deeper into your depository data and consider what additional information it contains that would be critical for analyzing depositor and deposit behavior.

Core deposit repricing changes in era of rising rates

From late 2008 through early 2016, there was little need to examine core deposit repricing thoroughly. The target federal funds rate remained unchanged with an upper target of 25 basis points (bps) from December 2008 through December 2015 while the 1-year Treasury rate moved only a few bps from month to month, changing from 49 bps in December 2008 to 53 bps in February 2016. Since then, however, market rates have risen; the upper target funds rate has increased gradually to 2.50% and the 1-year Treasury rate has climbed similarly to 2.55%.

In model risk management, just keeping up is no longer enough

In model risk management, just keeping up is no longer enough

As new risks emerge, the role of the Risk Officers and Risk Managers has become far broader and more complex, covering everything from regulatory compliance, operations risk and credit risk to data management, advanced technologies and industry disruption. Because the industry is changing so rapidly, financial institutions are compelled to ask whether their financial risk leaders are keeping up, or more importantly, keeping ahead of the change. Moreover, if the institution is just keeping up, the follow-up question is whether this current pace is enough. In other words, does the institution have flexibility in its talent, organizational structure, process and policies to protect itself from evolving risks?

Webinar recap: Many types of interest rate risk (IRR) affect community institutions

Webinar recap: Many types of interest rate risk (IRR) affect community institutions

Click here to watch the webinar: “Laying the Foundation for Interest Rate Risk (IRR) Management”

Over the last few years, the financial industry have questioned how much interest rates will rise and to what degree institutions are prepared. Compounding this uncertainty, community banks and credit unions have tried to cope with additional pressure to ensure sustainable profitability by tightening margins and cutting back costs. In response to these pressures, institution leaders have added to their balance sheet assets with longer maturities and more options. These products serve to diversify the balance sheet and widen margins, but in doing so may increase interest rate risk (IRR).

Q&A on MountainView's new 'Enhanced Daily Marks' solution

Q&A on MountainView's new 'Enhanced Daily Marks' solution

MountainView Financial Solutions, a Situs company and a leading advisor to the financial services industry, announced Monday that it has expanded its asset valuation solution to include Enhanced Daily Marks for a range of hard-to-value Level 2 and Level 3 assets. We interview Chris Kennedy, Managing Director, to learn more about the solution.

Q: MountainView has traditionally provided valuation services on a monthly or quarterly basis. Do the company’s current clients need more frequent marks?

Risk management and innovation can be balanced in financial services

Risk management and innovation can be balanced in financial services

The world we live in today features both high risk and high innovation. To some, innovation creates risk. The term “disruption” as at it relates to innovation indicates next-generation products, services and operations. The term “disruption” as it relates to risk management may stoke fear in the heart of the Chief Risk Officer.

If you ask a Chief Risk Officer what keeps a company running, the answer might be about strong foundational elements – identifying, prioritizing and quantifying risk – and implementing strategies and solutions to keep risk at bay.

Webinar series: Building an effective interest rate risk management framework

Webinar series: Building an effective interest rate risk management framework

When it comes to Interest Rate Risk (IRR) management, one thing is certain: Interest rates may rise of fall, altering how financial institutions approach the process. While some expect rising rates, and others expect a plateau, financial institutions should have a framework in place that can stand firm in any condition.

Overlooked avenues for selling mortgages can lead to larger profits

Overlooked avenues for selling mortgages can lead to larger profits

Consumer demand for mortgages is down, and lenders are trying innovative marketing tactics to raise their slumping production volumes. On top of that challenge, several wholesale or correspondent buyers are engaging in a price war that has caused several lenders to purchase loans at negative margins.

An unconventional perspective on interest rates

An unconventional perspective on interest rates

Despite predictions and announcements to the contrary, the Federal Reserve Board (Fed) might not raise interest rates at all this year.

That’s according to Richard Sheehan, Ph.D. and Senior Vice President, Analytics at MountainView Financial Solutions, a Situs company. He points to past years when the Fed consistently over-predicted the number of rate hikes it would carry out.

Four considerations for CECL model validation

Four considerations for CECL model validation

Welcome to the CECL time warp. When the FASB announced its CECL requirement in 2016, it seemed like there was an endless amount of time available to meet CECL 2021 implementation deadlines. Now, in 2019, the road to implementation seems like a speedy downhill drive in a car with squeaky brakes – except there are, in fact, ways to check the brakes along the way.

2019 in financial services: stories to watch part 2

2019 in financial services: stories to watch part 2

As an extension of last week’s article, subject matter experts and analyst from the Situs family of companies provided a few additional insights and trends to watch in financial services.

1. Uncertainty About How Marketplace Loans (MPLs) Will Perform in a Recession
“Origination of marketplace loans (MPLs) will continue to grow and steal market share from the credit card space,” said Chris Kennedy, Managing Director at MountainView Financial Solutions, a Situs company. “But there are many unknowns around MPL loan performance in a recessionary environment, and this could be troubling for leading platform providers.”

MBA Economist: Mortgage industry still has bright spots amid mixed economic and housing outlook

MBA Economist: Mortgage industry still has bright spots amid mixed economic and housing outlook

“I think there is a high and growing risk of a recession in 2020. You know, put it at odds of something like 1 in 3.”

Mike Fratantoni, Chief Economist and Senior Vice President of Research and Industry Technology for the Mortgage Bankers Association (MBA), delivered those words last week in a webinar hosted by MountainView Financial Solutions, a Situs company. Fratantoni shared an outlook in a broad to narrow scope that covered economic conditions, the housing market and the residential mortgage industry, and in each of those three areas he provided a mix of good and bad news.

5 financial industry stories to watch — part 1

5 financial industry stories to watch — part 1

FinTech advancements, digital banking and lending, AI and machine learning are all the buzz in financial services and will likely remain a highlight for 2019 discussions. However, analysts across Situs companies are looking at asset behavior, balance sheet risk and economic indicators that impact the foundation of the financial services industry. Here are five areas our analysts and advisors are watching in 2019:

AI in financial services: Monster or champion?

AI in financial services: Monster or champion?

“It is true, we shall be monsters, cut off from all the world; but on that account, we shall be more attached to one and other.”

— Mary Shelley, author of “Frankenstein, or The Modern Prometheus”

Reflecting on the current state of Artificial Intelligence (AI), one might say that in writing the novel “Frankenstein,” Mary Shelley unknowingly touched upon the fears and contradictions facing humans in the 21st century. Humans, in our desire to advance, are pushing the boundaries of innovation by creating intelligent thinking machines that could (in a worst-case scenario) become self-serving and fall out of the control of its creators.

Fewer homeowners paid off mortgages early during past 12 months

Fewer homeowners paid off mortgages early during past 12 months

Residential mortgage prepayment rates dropped in 48 states and the District of Columbia between the 12-month period that ended July 31 and the 12-month period that ended October 31. Nationwide, the average 12-month prepayment rate fell from 10.8% to 10.2% – a decline of 60 basis points (bps) – between the ends of the two periods.

In the shift to more sophisticated models, financial institutions should rethink governance

In the shift to more sophisticated models, financial institutions should rethink governance

For small and large institutions alike, financial models are growing more complex. Business leaders at financial institutions are more frequently relying on financial models to make informed and strategic business decisions, ranging from pricing and launching new products, to managing capital and setting reasonable internal risk thresholds.

MSR portfolio hedging left asset values unchanged in Q3

MSR portfolio hedging left asset values unchanged in Q3

Risk management activities for 14 of the largest holders of residential mortgage servicing rights (MSR) held asset values flat for the third quarter of 2018, according to the MSR Industry Report released last week by MountainView Financial Solutions, a Situs company. The largest gain among the 14 companies was 3.6% and the largest loss was -5.6%.