Capital Markets Examiner School, Providence, RI

Sensitivity Testing of Assumptions

 Management should be running alternative (Stressed) assumptions at least annually  Betas are doubled  Decay Rates increased  Change the deposit mix  Average Life cut in half  Running stressed scenarios can reveal risks in the balance sheet structure  Accelerated prepayments could reduce Interest Income  A shift in Betas could greatly reduce Net Interest Income  Loss of Surge Deposits or change in deposit mix could greatly increase Interest Expense

ASSUMPTIONS EXERCISE