useful the model when it comes to making informed decisions for institutions. In this current environment, this discussion around assumptions can help put an institution on the best path forward. Luke Mikles is a vice president in the Financial Strategies Group at The Baker Group. He joined the firm in 2019, serving in the Interest Rate Risk Department. In 2023, Luke moved to the Financial Strategies Group, where he assists institutions with the risk management process and speaks at Baker’s educational seminars across the country. Luke holds a Bachelor of Business Administration in energy economics from the University of Central Oklahoma. Contact Luke at (405) 415-7307 or lmikles@gobaker.com. Understanding how institutions will operate as rates fall will have a direct impact on modeling and, thus, a direct impact on model outputs. “sleepy depositor,” for the most part, has awoken. If this trend continues, institutions may not be able to drop their deposit rates as quickly as in past falling rate cycles. This will directly affect how interest expense fluctuates as rates fall; therefore, institutions should review and discuss this probability and the impact on the bottom line. As rates started to rise, the resurgence of the CD came right along with it. The composition of the balance sheet is another aspect of interest rate risk that changes along with the movement in rates. CD specials are a prime example due to the increased rates offered. As these products start to reach maturity, the institution should discuss the likelihood of whether those maturing dollars will continue into a similar product or possibly flow out into something else. For example, we have seen a migration of non-maturing deposits into CDs over the last two years. Will this trend start to reverse as rates fall? The review of model assumptions is by far one of the most important pieces of the ALM process. While it may not have seemed important in the past to discuss falling rate assumptions, considering rates were near zero for so long, it is at the forefront of the interest rate risk world now. Understanding how institutions will operate as rates fall will have a direct impact on modeling and, thus, a direct impact on model outputs. The more accurate the assumption, the more 21 NEBRASKA BANKER
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