Plansmith Blog

Do you have appropriate policy limits for all key interest rate risk measurements? How did you set your set them, and do they really still make sense for your institution?

When market rates weren’t changing, most institutions were in general compliance with policy limits. However, with the steady ramp up of rates through mid-2019, and then the massive drop in March of 2020, we’ve seen numerous financial institutions fall out of policy compliance. We’ve also heard from many of our clients that just aren’t sure what they should use for limits for the various non-parallel rate shock scenarios and now emphasized net income shock measurements. The old industry standard limits that so many institutions are still using just don’t seem to be working anymore.

Banking, like Yogi, is a unique bear. If you haven’t worked in the trenches, you probably just don’t understand it. It’s an industry best served by those who have lived it.

As unique as the industry is – you guessed it – your budgeting solution should be just as unique.

For the past ten years or so, surge deposits have been a material issue in asset/liability management. At the time of, and following the 2007-2009 Great Recession, the banking industry saw a substantial influx of deposits as real estate and equity investors liquidated positions and sought safe places to store their money and ride out the storm. The impact of this flight to safety was compounded by Government sponsored initiatives such as the Transaction Account Guarantee (TAG) Program and increases in Federal deposit insurance levels.

As a result, banks experienced significant deposit growth, and while these surge deposits would have normally been seen as a good thing, the near evaporation of loan demand left many banks with far more deposit dollars than they could effectively put to use. In turn, market liquidity levels skyrocketed, but margins were compressed. For the purpose of this article, we’ll refer to these funds moving from real estate, equities, or any other investments into the banking system as Type I Surge Deposits.

Everyone probably has their budgets in place for 2020 by now. And now comes along the Coronavirus and messes everything up. The Fed has already lowered rates by half a point. So, now you’re scrambling to figure out how this will impact your 2020 plans?

Seems like you have a few choices:

Knowing and understanding your organization's risk position is important. Regulators expect you to keep a close eye on your IRR exposure and be ready for a rising rate environment.

As you grow, your organization has more and more things to manage.

• Strategically, you’re working to find the right markets to penetrate with the ideal products and services.
• Financially, you’re making sure your earnings are meeting or exceeding targets.
• And organizationally, you’re looking for the right talent to expand and grow.

One thing you can’t ignore is the role Interest Rate Risk plays in the banking industry today.

Regulatory compliance costs are skyrocketing!

The focus of safety and soundness examinations continues to move towards asset/liability management and ensuring financial institutions are complying with the guidance issued in the last several years.

The purchase of an asset liability management (ALM) system presents a problem to many bankers. Often the process begins with the creation of a checklist of features and functions then progresses to comparing vendors. The vendor with the highest "score" wins. While this may be a good start, there are dimensions to the problem that this ignores, specifically the quality and significance of the features identified.

So why do we keep hearing about “surge” deposits and how important it is to know if you’re holding any? Well, it might be because in the past 10 years, CD balances in FDIC insured institutions have fallen by $880 Billion; yes, that’s Billion with a capital “B.” And while that may be the bad news, the good news is that over the same time period, non-maturity deposits (DDAs, NOWs, Savings, and MMDAs) have grown by $5.9 Trillion (with a capital “T”).

The October 2017 issue of ICBA Independent Banker features Dave Wicklund and his views on selecting a service provider for outsourcing your IRR analysis. You can find the article on page 57.