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Review the components of the balance sheet and the accounting identity which states that Assets = liabilities +equity
Define and review the concepts of Credit Risk
It is the danger that a borrower will simply fail to meet interest payments or repay a debt.
Increase credit risk to increase "Asset Utilization"
Define and review the concepts of Liquidity Risk
Liquidity risk is concerned with maintaining an adequate availability of funds for loan demand, deposit outflow, and expense payments in changing interest rate environments.
Increase liquidity risk to increase "asset utilization" ratio
Define and review the concepts of Interest Rate Risk
Interest rate risk is the potential impact of interest rate movements on an institutions net interest income and capital level. It focuses on the repricing speed of the institutions assets relative to liabilities.
Increase interest rate risk to increase "asset utilization" ratio
The 3 major goals of financial institutions
- 1. safety & soundness - measured by the capital to asset ratio
- 2. Competitiveness - measured by the growth rate of assets
- 3. economic viability - measured by the return on asset ratio
growth rate of assets ratio
gap = Rate sensitive Assets minus rate sensitive liabilities
how do changes in interest rates affect a credit union with a negative gap and a positive gap
negative gap - not as rate sensitive - when interest rates go DOWN - nii will increase
positive gap - very rate sensitive - when interest rates go UP - nii will increase
In todays real world, the yield curve s being shifted due to the following three factors
- 1. The Euro-zone debt crisis
- 2. The federal reserve's quantitative easing program (printing money to buy bonds)
- 3. The Treasury issuing large amounts of bonds to fund the federal deficit.
3 national credit bureaus - they are:
- Trans Union
Required ROA = Asset Growth Rate x current capital to asset ratio.
If a credit union wants to maintain the current capital to asset ratio at 7% for the upcoming year, it expects to grow assets 10% over the upcoming year, then it will be required to achieve a Return-on-assets of .70%
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