The liquidity-related behaviors of deposits and loans are complex and ever evolving. But they must be fully understood and accurately anticipated in order to attain adequate risk control and balance sheet management success.
To meet the need for quantified liquidity insights, MPS deposit and loan analysis reports include forecasts of immediate (cash flow) and maturity-related liquidity behaviors. The liquidity dimensions of traditional core deposits, high rate/semi-indexed core deposits, CD’s, contractual maturity loans, and indeterminate maturity loans can all be analyzed and their liquidity behaviors precisely forecast.
Four dimensions of deposit-related liquidity are quantified:
(1) What are the expected near term supply paths of deposit categories if interest rates remain constant? This "momentum" projection establishes the fundamental liquidity of deposit funding.
(2) What are the expected near term sensitivities of deposit supply paths by categories if interest rates rapidly rise or decline? These "sensitivity" projections establish the stability (or lack of stability) of supply across a crucial liquidity test parameter.
(3) What are the expected long term retention/run off patterns in the institution’s deposits if interest rates remain constant? These can also be used to calculate baseline deposit average lives.
(4) How stable are retention/run off patterns and average lives as interest rates change? This tests if there is any material exposure from changing interest rates in this dimension.
Four dimensions of loan-related liquidity are quantified:
(1) Standard analyses determine baseline prepayments and their interest rate sensitivity for loans with contractual maturities.
(2) Special analyses of net run off information determine baseline early pay off behaviors for loans with indeterminate maturities (e.g. credit card and line of credit balances).
(3) Because prepayments are estimated in a simultaneous equations model, “echo effects” among loans prepayments by category are also quantified. For example, a 1-4 family first mortgage prepayment will also cause second mortgage and home equity balances to prepay. But if money is taken out at the refinance, consumer loans may also prepay.
(4) Total loan balances outstanding behaviors can be quantified as necessary. Rate, trend, credit quality, seasonal, and other influences on outstanding loan balances are examined in these analyses. Using MPS forecast information, financial managers are empowered to understand and more precisely control existing volumes loan-related liquidity risk.