Overview

Reinvestment assumptions should be made on all interest bearing asset and liability accounts. If no assumptions are made, the weighted average rate for that type (fixed, floating, adjustable) will be used. The exceptions to this are the Fed Funds Purchased and Fed Funds Sold balancing accounts, which will require the user to make assumptions.

Current market rates are the best source for the reinvestment assumptions. The rates currently earned or paid on any particular account are the most appropriate assumptions for the current rate environment. However, educated guesses have to be made for the rates in the various shock scenarios. Many times institutions maintain in-house indices for many of the interest bearing accounts. During the Index assumption process, predictions are made on the pricing levels of the indices under the various shock scenarios.

In order to make the assumptions easily maintainable, assumptions should be tied to base indices whenever possible. This will carry across the assumptions that have already been made to the pricing levels of the index under the various shock scenarios.

Appropriate spreads or percentages should be determined and set to derive at the final assumption rates. Then, from month to month, the base indices can be adjusted to correspond to changes in the market place. All reinvestment assumptions that are tied to these indices will follow suit and will only be evaluated for any required changes in the spread or percentage that was originally applied.

We will now work our way through making a sample set of assumptions. This was done only for illustration purposes. The assumptions applied here are only examples. The thought process for making the assumptions can act as a guide in determining your own assumptions.

Assumption Guideline Summary

In Summary: