- This Abrigo article was originally published May 28, 2026, on CUInsight.com.
How behavior, not rates, is shaping balance sheet risk in 2026
May 28, 2026
0 min read
A new framework for interest rate risk
For years, interest rate risk was treated as a directional problem. Rates moved up or down, and balance sheets responded in predictable ways, shaping how many institutions built their models, set their policies, and evaluated performance.
That framework no longer holds. Since 2022, the rate environment has been defined by volatility rather than direction. Tightening cycles, pauses, inversion, and shifting expectations have all played a role. What matters now is not just where rates land, but how they move along the way and how members respond to that movement.
Deposit behavior is driving funding outcomes
Many institutions still report results that fall within policy limits under standard assumptions. The issue is that those assumptions often rely on static balance sheets and simplified behavioral inputs. When you introduce more realistic conditions, exposure tends to widen. That gap between reported comfort and actual sensitivity is where directors need to focus.
The deposit base most institutions relied on a few years ago has changed. During 2020 and 2021, excess liquidity pushed balances into noninterest-bearing and savings accounts. Those funds were treated as stable and low-cost, supported by historical studies showing long-tenured relationships and consistent behavior.
As rates moved higher, those balances moved. Funds shifted into time deposits offering materially higher yields. In many cases, institutions held pricing steady on savings and checking products, so the increase in funding costs came from mix changes rather than rate adjustments.
Pricing assumptions alone don’t explain what happened. If reporting focuses only on beta and lag, it misses the effect of reallocation. At the board level, the question is straightforward: do you know what is driving your funding costs today? If migration is doing most of the work, then traditional beta measures are only telling part of the story.
Turn CECL and stress testing from compliance exercises to forward-looking decision tools.
Register for the webinarBeta assumptions can hide structural risk
Beta analysis has its place. It shows how pricing moves relative to the market. What it doesn’t show is how balances move.
Averages can give a sense of control while masking concentration risk. A blended beta may look reasonable even when a small group of rate-sensitive customers is driving most of the movement. When pricing changes and balances shift at the same time, the resulting cost impact can exceed what the model suggests.
That becomes more pronounced in concentrated portfolios. If a relatively small segment of customers holds a large percentage of balances, their behavior will outweigh any average assumption. Understanding that structure is more important than refining the average.
Shock size changes the outcome
Interest rate sensitivity does not scale in a straight line. Under smaller shocks, exposure often appears manageable. Increase the magnitude of the scenario, and different risk factors begin to show up. Migration accelerates. Betas behave differently. Optionality becomes more relevant.
This is where many institutions are surprised. The model produced acceptable results under a narrow range, and those results carried into planning decisions. When conditions moved outside that range, the underlying assumptions no longer held. Running larger and more varied scenarios is not about adding complexity. It is about understanding how the balance sheet behaves under less stable conditions.
Demographics introduce timing risk
Deposit stability is often evaluated in aggregate. That approach misses an important variable: who holds the funds.
In many institutions, a relatively small percentage of depositors holds a large share of balances, and those balances are concentrated in older demographics. In one example, depositors over age 60 represent the majority of non-maturity balances while accounting for less than half of accounts.
That introduces a different type of risk. Historical decay studies look backward. Demographic trends point forward.
Estate transitions, advisor-driven reallocations, and liquidity events can change balances quickly. Those events do not follow the patterns captured in traditional decay assumptions. Directors should expect to see that segmentation reflected in reporting. If concentration and age are not part of the analysis, a key driver of funding stability is missing.
Stress testing needs to connect to decisions
Most credit unions have no problem running stress tests and sensitivity tests. They can adjust assumptions, generate scenarios, and show exposure under different conditions. But how are they using the results? If a scenario shows faster funding cost acceleration, does anything change in the deposit strategy? If a runoff scenario indicates pressure on liquidity, does that influence funding plans or asset duration? If the answers are unclear, the testing process is disconnected from decision-making.
Assumptions do not move independently. Deposit pricing, migration, and customer behavior tend to shift together. When those factors are combined, the impact on earnings and capital is often greater than what isolated adjustments suggest.
From a governance perspective, the focus should be on how sensitive the current strategy is to those combined effects and what conditions would lead to a different course of action.
Moving from compliance to strategy
Supervisory guidance continues to emphasize assumption sensitivity and model transparency. Most institutions can demonstrate that they meet those expectations. The distinction is in the way that work is used. Some institutions treat sensitivity analysis as part of the reporting process. Others use it to inform planning decisions, and this can quickly impact how they respond to changing conditions.
When assumption changes are incorporated into strategy, ALM becomes part of how the institution manages growth, pricing, and funding. It helps define limits that reflect actual behavior and identifies conditions that warrant adjustment. Without that connection, the process confirms what is already in place.
What directors should focus on
The current environment places more weight on behavior than on rates alone. Directors should be asking:
- What portion of funding cost changes is driven by pricing versus migration?
- Where are deposits concentrated, and how is that reflected in runoff scenarios?
- How do results change under larger or more volatile rate paths?
- What specific outcomes would lead management to adjust strategy?
Clear answers to those questions provide a better view of exposure than policy compliance alone. Credit unions that incorporate behavioral dynamics into planning will have a clearer understanding of their position, whereas those that rely on static assumptions will be reacting to changes after they occur. The difference will become apparent in margins, liquidity, and flexibility when conditions shift again.
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