Plansmith Blog

Why Community Bank ALCOs Fail: The Wrong Tools

Posted by Craig Hartman on 6/24/14 4:00 PM
Now that you have clarified your purpose, we can discuss using the right tools.

While "No pain, no gain" may be an effective strategy for muscle building, it is counter-productive in margin management. There are institutions that have an entire staff devoted to running asset-liability management systems only to finish in time for the ALCO meeting, only to begin all over again.

Just because we can use a computer does not make it useful. We are continually amazed by supposedly sophisticated systems that can require several hours to produce a single scenario. These models discourage creativity and thoughtful analysis. Models should shorten the time and data requirements for use otherwise; no one will want to use them.

Planning models are learning tools not predictors. The more scenarios investigated the more we learn about the behavior of our margin and our organization. Speed of operation is not just a convenience, but it encourages learning and allows us to sharpen our strategies. More importantly, speed allows continuity of thought when developing an idea. We get immediate feedback. A model must be efficient to be effective. We can take a good model right into your ALCO meeting and simulate new ideas on the fly.

Asset-liability management complexity increases inversely to the volume of data. Effective modeling systems actually generate their own input based on our assumptions using relationships. Prepayments, for example, should automatically adjust by the system for every change in the rate environment. Growth and seasonal distribution of new balances should automatically adjust as rates rise or fall to reflect customer behavior or competition. Models should reduce data entry, save time and give results that are more thorough.

When we speak of a models speed, it applies to more than just the computations. Speed, when communicating concepts are even more important to the strategy development. Graphics are the best way to transmit the issues and solutions quickly and clearly. These are not just time series graphs but rather behavioral graphs that become models to use to forecast and explain behavior. Behavior graphics lead naturally to action plans.

For example, behavioral analyses using multiple rate shock simulations allow us to describe a completed asset-liability management analysis into a quick and complete display or description of yield and margin behavior. Through graphs, we see both description of the problem and the solution simultaneously. No other format provides this prospective. Using these powerful tools, we turn complexities into simplicity.

At the risk of branded a heretic, let me say that the solution to margin management is not to be found in the accounting systems. Regardless of the linkages between general ledger, accounts payable, fixed assets, investments, loans, deposits and your asset-liability management system, the answer is not there. The data in your accounting system is the history. Bankers are often so rooted in their general ledger, that they mistakenly believe that they must pull data directly from the mainframe or they cannot do and effective job. Although that is comforting, asset-liability management and the ALCO must deal with the future, not the past.

Check back for the final part of this series, "Why ALCOs Fail: Staffing the ALCO".

Topics: ceo, community bank, community bank strategy, community bank ALCO, community bank budget software, ALCO

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