Capital Markets Examiner School, Providence, RI

Implications of Average Life Assumptions

 EVE = NPV Assets

– NPV Liabilities

The longer the time period, the lower the NPV. For Liabilities in a positive yield curve (holding  assets constant), a lower NPV equates to a higher  EVE or more Asset Sensitive.

Sensitivity Testing of Assumptions

 Assumptions drive simulation results

 Assumptions are (hopefully) based on historical analysis and expected behavior

 But what if the assumptions are wrong….  What if loans prepay faster than expected…  What if depositors require higher interest rate increases…  What if surge deposits leave…  What if our deposits are not as long-lived as we think…