MARY ALICE AVERY mavery@wilmingtontrust.com 302.636.6127 CARMEL VIADO cviado@wilmingtontrust.com 702.866.2247 Trustee Services for Senior and Subordinated Debt and Trust Preferred Securities Investment Subsidiaries and Holding Companies Custody ENTITY MANAGEMENT DELAWARE AND NEVADA EXPERIENCE Wilmington Trust is a registered service mark used in connection with corporate and institutional services offered by certain U.S. and European subsidiaries of M&T Bank Corporation. Not all services are available through every domestic and international affiliate or in all jurisdictions. ©2024 M&T Bank and its affiliates and subsidiaries. All rights reserved. AMP-6681 240326 VF can become skewed and misleading. It is important to note that one should not wait for a large variance on a back test to adjust assumptions. The process should be proactive and ongoing. Back testing allows us to validate the assumption development process and make additional adjustments if needed. As the Federal Reserve gears up for rate cuts, it will be critical to check falling rate assumptions and ensure they are modeled realistically and properly. Continuing with the same example, we saw CD rates skyrocket as the federal funds rate rose. But will we see that same impact as the federal funds rate falls? These are questions we should ask, and then use the back test to help answer these questions. To reiterate, independent reviews are an important aspect within the ALM and IRR process. Back testing helps to affirm a good process by validating model assumptions and assists in making improvements to model inputs when necessary. And while the variance range from a back test is important, it is also important to not solely focus on that one output. Instead, it is crucial to understand the reason, or lack thereof, for the variance in the first place. As we continue through this rocky rate cycle, IRR and back testing will continue to take a front seat in helping institutions make important decisions. Luke Mikles Vice President – Financial Strategies The Baker Group LMikles@GoBaker.com Mikles joined the firm in 2019, serving in the Interest Rate Risk Department before moving to the Financial Strategies Group in 2023. There, he assists institutions with the risk management process and speaks at Baker’s educational seminars. Mikles earned his bachelor’s degree from the University of Central Oklahoma. The Baker Group is a Preferred Service Provider of the Indiana Bankers Association and an IBA Diamond Associate Member. NOVEMBER/DECEMBER 2024 31
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