Stress Test Your Budget
December 5, 2013
Budget season is in full swing and with that comes putting your best foot forward regarding what could happen in the future. This is never an easy task whether you are budgeting for 2014 or doing a long-term financial forecast into 2015 and beyond.
In our work with helping credit unions through the budget process, we have found that testing “what-ifs” on key assumptions can be extremely valuable. Future loan growth is always an important assumption in budgeting. Many credit unions have struggled to grow loans, especially consumer loans, over the past few years. At the same time, many of these same credit unions are reporting significant loan growth over the past 6 months. As a result, some institutions are assuming this 6-month trend will continue into 2014 and beyond. Important questions come to mind, such as:
- What kind of impact does this have to the forecast?
- What if it does not come true?
- What if the offering rates are lowered to keep growth up?
To answer these questions, we recommend testing the impact of different levels of loan growth and offering rates. Higher loan growth can help, but doing so at materially lower yields can hurt the institution. The last thing you want to do is work a lot harder to earn less money, without intentionally deciding to do so. The results of the stress tests can help ALCOs and boards better understand the sensitivity of the earnings and inform what the credit union may want to do going forward.
