Virtually every business prepares a budget and calls it planning. Some actually develop strategic plans every couple of years to go through an exercise in search of new ideas and approaches. Very few, if any, reap or even appreciate the benefits of planning outside of the financial benefit they hope to realize. While the intentional outcome of these efforts is profit-based, the other powerful benefits are often overlooked. This includes building the necessary buy-in and trust within the organization to achieve the financial goals. For many organizations, this is the missing key that’s needed to support effective execution of the plan. It’s the lack of genuine buy-in that confines the plan to the top shelf of a bookcase somewhere.
Plansmith has been building financial planning software for community banks for over 45 years. More than just coding keystrokes and calculations, though, we understand the real process of planning and build systems that seamlessly integrate into that process.
In the last post, we discussed the responsibilities and planning software opportunities of the Asset Liability Committee (ALCO), Investments/Funds Management, and the CFO. This post will address the role of the Community Bank's Branch/Department Managers, the Marketing Department, and the CEO/The Board.
Who in your community bank should be using planning specialty software? Accounting, the Board, the ALCO? You might be surprised as to how many various areas/departments and their respective managers should actively use and benefit from an automated planning system.
What are the various functional areas and departments that should be actively involved in planning at your community bank?
Gap, beta-adjusted gap, duration and even basic budgeting models only frustrate, confuse and even mislead the financial institution’s asset liability management committee (ALCO). Detailed gap analysis, fiddling with the distribution of savings balances and even calculating the duration of equity does not lead to better margins, nor do they mitigate rate risk.
Since the introduction of the venerable GAP analysis in the mid-1970s, risk management has continued to evolve. It has moved from the basic mismatch of rate sensitive assets and liabilities to more sophisticated techniques – such as prepayment modeling, rate change betas on non-maturing deposits, and rate shocking with parallel rate shifts and non-parallel rate shifts. Then mark-to-market analysis of the balance sheet and the impact on equity was brought in with the attendant benchmarks. These are all interesting measurements of the company’s risk at a point in time. It’s like glancing at your car’s dashboard.
In part one of this series, we discussed establishing your goals and developing several alternatives or contingency funding plans. Next, we will discuss the remaining 3 rules.
"May you live in interesting times." This ancient Chinese proverb continues to describe the nature of banking. The banking community is going through the most challenging period since the Great Depression. Not only is the economy unsure, but flat interest rates, coupled with new regulation and increased consolidation, have caused massive structural changes within the financial industry. In brief, the task of management has become more difficult. It has changed from a maintenance task to one of survival. Today’s banker must be more sensitive to marketing, pricing, resource allocation, and productivity than at any time in the past. He/she must sharpen their business expertise, marketing skills, investment sense, and develop a tougher attitude toward expense control. To accompany all this, you must have the appropriate informational tools that allow you to assimilate and evaluate the impact of possible changes to the institution’s current and future income.
Financial institutions are not like other businesses. After all how many other businesses get a daily statement of condition? In what other business is the balance sheet also the product list? It must be remembered that a financial institution’s directors typically come from other industries. For these reasons, it is management’s responsibility to translate the business model, key operating ratios and banking language into terms familiar to directors to insure meaningful dialog.
There is an architecture design concept that says, "form follows function." Once the ALCO has determined what it must do, it must inventory the resources at hand as well as those necessary to make it successful. Among these resources are the men and women within your company whose abilities and perspective will contribute to achieving the goal. It is safe to assume that the general purpose of the ALCO is to control the behavior of the net interest margin by understanding and controlling the factors that affect margin.