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.

Modern technology has given us the enhanced dashboard; the Global Positioning System (GPS) not only tells us where we are but where we are going. It provides a view of our surroundings as well as the best way to go and driving times. Clearly, if you are in familiar surroundings it’s not necessary, but people are often surprised at what they didn’t know about their surroundings.

With this in mind, we can liken current risk analytics to a dashboard and the ability to measure future risk to a GPS. Future risk is derived from our plan. Using all the information we currently have to develop a profit plan (or budget, if you prefer), we can then check our risk position at some future point to determine if our planned actions will maintain our current risk level, improve it, or increase our risk. In many ways the company’s future risk position is more important than its current position. The current risk position is a fact; you are in it. You can only change it by your actions. Knowing the impact of those actions on a future risk position is important.

In light of the above, if your current risk analysis process doesn’t include a future risk analysis based on your plan, then you are only getting half (or less) of the answer you need.

"If you don’t know where you’re going, then any road will take you there."

-Cheshire Cat in Alice in Wonderland

We hosted a free webinar on December 18th, where we took a more in-depth look at future risk analysis. To access a copy of the recording, click here!