The pandemic has caused an abundance of uncertain times. It’s becoming repetitive to talk about, but it’s of major importance for the banking industry. At one point, it looked like things were getting back normal, but then a new variant of the virus has created some confusion for the future.

For the upcoming budgeting season, we thought it would be beneficial to discuss some dynamic options for balance sheet models that we can run for banks. These models provide an idea of what rate sensitivity analysis could look like if banks wanted to compare different scenarios with different balance sheet totals.

Before we dive in, let’s see a quick market update from second quarter 2021 to now. There really hasn’t been too much change regarding interest rates, as you can see from the charts below. The effective fed funds target rate remained relatively unchanged between .08% and .10% (according to the St. Louis Federal Reserve website) while U.S. Treasury rates declined slightly.

US Treasury Actives Curve

*Source: Bloomberg Terminal as of August 31, 2021

Effective Federal Funds Rate Aug 2021

*Source: St. Louis Federal Reserve

The 3-Month Treasury Bill rate decreased by .5 basis points from the end of last quarter, moving from .041% to .035%. The 2-Year Treasury Bill rate decreased by 4 basis points, moving from .249% to .209%, while the 10-Year Treasury note decreased by 16 basis points from 1.468% to 1.309%. As you can tell, Treasury rates continue to remain at historically low levels.

U.S. commercial bank median balance sheet data

We also want to review a few charts of U.S. commercial bank data that shows median loan growth rate and median deposit growth rate over the last few quarters from 2020 and 2021. Showing this data may give your bank an idea of some different ways to model deposit growth (runoff) or loan growth (decline) in comparison to the national average.

US commercial banks median loan growth rate 2021

Source: S&P Global Insight, 2021

US commercial banking median deposit growth rate 2021

Source: S&P Global Insight, 2021

Dynamic balance sheet modeling

We are still living inuncertain times. The pandemic ups and downs are  causing some banks to react as rumors of more shutdowns loom. In light of that, our team thought it would be a good idea to discuss the difference between static and dynamic balance sheet modeling, and what we can offer as far as dynamic modeling goes.

The static model approach is the norm, and what banks use on a regular basis. The static balance sheet assumption stipulates that all account balances remain unchanged over the simulation horizon. Any balances that mature or roll-off during that period are replaced on the balance sheet, using the terms and structure specified in the reinvestment assumptions.

In contrast, dynamic balance sheet modeling takes in to account the current state of the balance sheet as well as any possible changes in the asset-liability mix brought on by either anticipated changes in the bank’s market or planned changes envisioned by bank leadership.

While the static balance sheet approach will satisfy a regulatory requirement, using a dynamic balance sheet approach from time to time can help in decision making. In our models, we can create scenarios ranging from loan growth all the way to showing the effects of non-maturity deposit runoff (or both). Another benefit of using a dynamic balance sheet approach is that it helps you look at situations when you may be out of policy in certain rate scenarios or getting close to being out of policy. We can change the asset-liability mix and play around with it to see what areas of improvement can be made to move the bank back in to policy.

Let’s look at an example to show exactly what we mean by this. We currently have a client that likes to see what the effect of a non-maturity deposit runoff every quarter will have on their rate sensitivity analysis results. They typically provide a certain dollar amount that they want to see runoff their balance sheet. We will modify the balance total in our model to show the effect this will have compared to their original reports that used the static balance sheet approach. As you can see from the balance sheet screen shot below, this particular quarter they ran off $7,708,000 in non-maturity deposits.

balance sheet example 2021

*Source: FSG RSA report

The results didn’t change much from one scenario to another, but it demonstrates what would happen if they saw a sudden increase or decrease in their deposits. As mentioned earlier, the same scenario can be run for investment portfolio, loans, time deposits, etc.

There are no restrictions on the types of changes you can make to your specific balance sheet categories. The only restriction is your imagination.  We can model the most drastic situations as well as something very basic. We can use a specific dollar amount to run off (or add growth) immediately, or we can use a percentage growth or decline over a specified period.

As recent data show, banks saw an excess of cash on their balance sheet after the pandemic hit. Because that was more than a year ago, using a dynamic balance sheet modeling approach in the near future might be a very good option to help anticipate possible changes banks may see. That could mean using cash to underwrite more loans or use it to expand your investment portfolio. In previous quarters we have discussed the stress testing options that we have, but this is different than a stress test. With the stress test, we are stress testing your current balance sheet. With a dynamic scenario we are changing balance totals and then running the rate-sensitive assets (RSAs) as normal with those altered totals.

Let’s take a look at the other scenario of dynamic balance sheet modeling that some of our clients have used. Instead of an instantaneous dollar amount runoff or growth, the client wanted to see a percentage increase in their loan portfolio as well as their deposits over the course of a specified period. In this instance they requested their loans grow at a rate of 3.5% over a full calendar year. This equates to essentially a .29% growth each month. Then, they wanted their time deposits grown at a rate of 2% for a full calendar year (so about .17% per month). Looking at a snippet of their balance sheet below, you can see the changes in those totals.

Balance sheet example loans and deposits

*Source: FSG RSA report

They also made some instantaneous dollar amount changes to specific categories, but we showed that scenario earlier, so we wanted to show the option of percentage changes over a specific period. Again, this won’t significantly change your report unless you make drastic changes.  The whole point of this modeling exercise is to plan and review what your balance sheet could look like at a time frame in the future.


The pandemic has caused—and continues to cause–uncertain times, and in many ways caused bank balance sheets to change in ways that have never been seen before. The hope is we are moving back into some “normalcy” which may also some big changes to bank balance sheets, further demonstrating  the importance of using dynamic balance sheet modeling as a tool for business planning.

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