Capital Markets School - October 2023

Internal Use Only

Sensitivity Testing of Assumptions

•Betas are doubled •Decay Rates increased •Change the deposit mix •Average Life cut in half Management should be running alternative (Stressed) assumptions at least annually •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 Running stressed scenarios can reveal risks in the balance sheet structure

35

Internal Use Only

IRR Measurement Models and Model Risk

36