Testing the Budget’s Interest Rate Risk
August 8, 2014
Budgeting season is around the corner. Credit unions will spend valuable time and resources over the next few months developing budgets that achieve ROA and net worth goals. As the budgeting process moves forward and nears completion, decision-makers should ask: What happens to our interest rate risk if the budget comes true?
Budgeting helps credit unions understand the new business decisions they have to make in order to achieve their ROA and net worth goals in the following year. However, it won’t show the risk trade-offs the credit union may be making as a result. Decision-makers don’t want to be surprised if the credit union achieves its budget only to find out the credit union has gone beyond its risk tolerance.
Using the budget, credit unions can create a target financial structure by using the year-end budget numbers as a starting point and running it through their risk model. With the results in hand, decision-makers can determine if they’re okay with the risk produced by the budget or if they need to make adjustments to mitigate risk.
