It was only two months ago we released a blog discussing the critical role that liquidity management will play in 2023. Fast forward to now, and two financial institutions have been closed due to, at least in part, funding imbalances – the first banks in three years to fail. Although liquidity and interest rate risk often take a backseat under stable economic conditions, times like these require you to take an in-depth look into your asset liability management program to ensure you have a plan to both meet funding needs and stay in compliance with regulatory expectations.
The failures of Silicon Valley Bank and Signature Bank highlight the importance of both managing interest rate risk and maintaining adequate liquidity to meet potential funding needs. To avoid similar failures in the future, financial institutions need to focus not only on credit risk, but also funding risk and the critical role that asset liability management plays in overall financial institution operations. This means having a diversified funding base that is not overly reliant on any one source of funding, as well as implementing strong risk management practices to identify and mitigate potential liquidity and interest rate risks.
Bank failures serve as a reminder of the importance of maintaining adequate liquidity, especially during times of economic uncertainty and rate fluctuations. As the banking sector continues to evolve and face new challenges, it will be essential for organizations to remain vigilant and take proactive steps to ensure they can meet the needs of their customers while maintaining financial stability.
Unfortunately, there are many community banks and credit unions that have similar risk profiles as that of Silicon Valley Bank – material levels of large deposits and significant EVE exposure to rising rates resulting from concentrations in longer-term securities and loans. It’s no doubt that both interest rate risk and liquidity will be coming under increased regulatory scrutiny for the foreseeable future.
How can Plansmith Help?
We offer a wide range of tools and professional advisory services designed to help financial institutions measure, monitor, and manage their interest rate risk and liquidity positions more effectively.
Plansmith helps you remain in control of your funding risk by providing you with powerful interest rate risk and liquidity management software built into our budgeting and forecasting models. This software enables you to generate accurate cash flow forecasts, stress test your balance sheet, and identify potential liquidity gaps before they become a problem.
Plansmith also offers a range of consulting services to improve the reliability of your asset liability management program and comply with regulatory expectations. Our services include deposit stability/decay studies, sensitivity testing, backtesting, cash flow stress scenario development/review, and even fully outsourced solutions. By working closely with banks and credit unions, we identify and address potential liquidity risks while helping you stay ahead of economic shifts and actively prepare alternatives.
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Director of ALM Advisory Services