Happy one year anniversary to Sparks from the Anvil! There has been a great response to the blog, thanks to all of you.
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.
Whether your year-end is calendar or fiscal, there are a few things you can do to make the future-you happy. Examiners and auditors thoroughly enjoy marking off their-checklist of items to review and criticize. Most times the request letters ask for the same documents year-after year. Create an exam folder complete with instructions for yourself for the following year.
Interest rate risk, call reports, budget, ALCO, board meetings, re-doing the budget, exams, audits, holiday parties, vacation schedules…I’m already exhausted. My suggestion, budget your time! I can’t tell you how many times I hear clients say they had to postpone scheduled days off to complete their workload. This is the perfect time to plan what you can before year-end.
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.
Non-financial businesses ranging from the humble lemonade stand to the behemoth WalMart are easy to understand. The assets being transacted are, for the most part, quite tangible. It is easy to understand that something is manufactured, it is delivered to a retail place of business, it is stored in a warehouse as a portion of inventory, it is displayed on a shelf and it is ultimately purchased by people like you and me to put in a bag to take home. The equivalent chain of distribution can be identified in banking but there is one big difference that makes it all the more complicated. It is the fact that the product, being money in its many different forms, is not something you see, feel, taste, hear, or smell in any direct way.
Opening night featured a performance by singer Eddie Money, which literally had the Washington Convention Center "shaking to the beat of the night". Day two presented a strong stream of visitors to the many exhibitor booths spread out around the convention center floor. It was great to finally put a few client faces to the many voices that we speak to regularly. We met a number of new credit unions that were interested in our solutions for managing risk and active planning. It was fun being able to run our Financial Compass model for these individuals, right there on the convention floor. Some really seemed impressed by our ability to quickly provide a two and three year rolling forecast for their organization. Impressive perhaps, but after all, "the future is ours to see".