Asset-Liability Management at Gem State Credit Union

By Tokle, Robert J.; Tokle, Joanne G. | Journal of the International Academy for Case Studies, January-February 2007 | Go to article overview

Asset-Liability Management at Gem State Credit Union


Tokle, Robert J., Tokle, Joanne G., Journal of the International Academy for Case Studies


CASE DESCRIPTION

The primary subject matter of this case involves the use of GAP analysis to measure the interest-rate risk exposure of a credit union. Secondary issues examined include interest-rate changes in the economy overtime and the Fisher Effect. The case has a difficulty level appropriate for junior level students and is designed to be taught in about 45 minutes. This case could be used for classes in money and banking (economics), managerial economics, depository institutions management and possibly other management courses.

CASE SYNOPSIS

This case could be used to familiarize students with the balance sheet of a credit union and to understand the interest-rate risk that results from the nature of a depository institution's balance sheet. Students will also learn to calculate a GAP analysis for the credit union and to critically analyze the GAP methodology used by credit union management and are asked to offer an opinion on what this credit union could do to manage their interest-rate risk.

INTRODUCTION

Gem State Credit Union (GSCU) is a medium sized credit union located in the mountain west. In 2002, it had $50 million in assets and a relatively healthy capital-to-asset ratio of around nine percent.

Increasingly, the National Credit Union Administration (NCUA) has emphasized that credit unions show that they understand interest-rate risk due to their asset/liability structure and that they are able to manage it. In their examinations of credit unions, they look in the board of directors' minutes for evidence that the board does monitor its asset/liability structure. Also, many credit unions now have an asset/liability management (ALM) committee that typically meet monthly to examine their asset/liability structure and recommend to the board any changes in interest rates or products that are needed to limit their interest-rate risk. GSCU soundly passed their annual NCUA examination in the spring of 2002. This case takes a closer look at the ALM analysis done by GSCU.

Les Norris has been the CEO of GSCU for the past 24 years, having brought it back from the brink of bankruptcy when he was hired in 1980. He is the chair of the ALM committee. Also serving on the committee are Ken Whitmore, VP of operations, John Harris, VP of lending, and Bob Thomas, chairman of the board of directors and president of G&T Economics, an econometric forecasting firm. Members of the ALM committee have worked well together for several years, but recent economic developments have caused a divergence in opinions as to how to set future rates.

WHY IS ASSET/LIABILITY MANAGEMENT NEEDED?

Depository institutions (DIs), which include banks, savings and loan associations and credit unions, have two major types of risks. Credit risk is the risk a DI takes when it makes a loan that may not be paid back in full. When a loan is not paid back in full the unpaid portion must be charged-off, which reduces the DI's capital and profits. DIs try to manage credit risk by screening and monitoring borrowers.

Interest--rate risk results in changes of profitability that a DI experiences from changes in interest rates in the economy. This risk is transmitted through their asset/liability structure, since asset yields and liability costs (largely interest paid on deposits) will have different sensitivities to interest changes.

For example, a classic case of interest-rate risk that caused major problems happened to savings and loan associations (S&Ls) in the 1980's. The major assets for S&Ls were home mortgages, which typically are long-term loans of 15 to 30 years. Also, all mortgages until the mid- 1970's had fixed-interest rates, as most also have today. However, the major liabilities for S&Ls were savings deposits. Thus, the S&Ls had a maturity mismatch of assets and liabilities. Their assets had long-term maturities while their liabilities had short-term maturities and were much more interest rate sensitive. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Asset-Liability Management at Gem State Credit Union
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.