ALM: In-House or Outsource?

By Mark H. Smith

Part One: Evaluating the Costs and Benefits of In-House ALM
In making the decision to perform interest rate risk analysis in-house or use an outside vendor, it is important to consider the available expertise in-house versus the additional value added benefits and expertise that can be obtained from utilizing a supportive outside partner.

Cost Considerations

When evaluating the direct cost of performing interest rate risk analysis in house, the purchase cost of an interest rate risk model is only the very beginning and possibly the least costly component when considering all direct and indirect costs of the process. Other direct costs include the following:

• Employee
• Implementation and development
• Software and IT maintenance/support
• Training and retrain
• Outside services support (e.g. market rates, assumption support, investment analysis)
• Customization (e.g. data inputs, software, outputs, and reporting)

Indirect costs can include:

• Inaccurate model output resulting in poor strategic decisions
• Inaccurate model output resulting in an inaccurate risk assessment and risk management
• Regulatory risk of an inaccurate or incomplete process
• Business risk of key employee(s) leaving the credit union
• Business continuity planning inclusion

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Taming the Black Box

By Mark H. Smith
CEO, Mark H. Smith Inc.

The term black box as used in the world of financial management refers to a piece of computer software which, when given a series of inputs, spits out answers. What makes the box black is that the software is so complex that most people can't understand how it works. That leaves them with either the choice of making decisions without the information they need or relying on the black box output information that they don't fully understand. Reliance on black box output has the potential to make one look brilliant or totally incompetent.

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Economic Outlook—Cold Weather & Pent Up Demand

By Jason Williams
Financial Analyst, Mark H. Smith, Inc.

At the beginning of 2014 we discussed the idea that the economy may finally be turning around after almost five years of stagnant growth, high unemployment, and sinking real estate values. Although there has been much positive data to support this idea, the last three months were unusually cold for many areas of the United States and that adverse weather definitely had a negative impact on economic growth in early 2014.

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Client Corner: Trying a New Sport

By Cynthia R. Walker, COO, Mark H. Smith, Inc.

A few years ago I took up the sport of road biking. As I started to learn about the different types of bikes and equipment I realized it was more complex than I ever imagined. Like riding a bike, as we learn more about the subject we come to acknowledge its intricacies and complexities even if we don't completely understand them.

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Featured Webinar Recording

Managing Your Investment Portfolio in a Rising Rate Environment (Apr 22, 2014)

Do you like all of the investments in your investment portfolio? If you own callable securities you may be holding those securities longer than you have in the past. When interest rates rise, the dynamics of your investment portfolio will change. If you haven't visited your investment strategy recently, 2014 may be a great time to do so.

Read more about this webinar.

Is Your Regulator Requesting a Third-Party Review?

A third party review is frequently requested by regulators who would like to see a second opinion as to the quality of the credit union's IRR management process. Learn More

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