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.
So if you’re reading this, my second ever blog post, you’ve probably already seen the first one entitled "Independent Review, Model Validation, and Backtesting: Same Thing, Only Different." In that piece, we looked at the interrelationship of these three items and brought up a few questions on backtesting. Specifically, we questioned who should do it, how often should it be done, what period should be covered, do you need to backtest model results and assumptions, and why even bother if market rates really aren’t changing.
Margin risk tolerance calculates the minimum net interest income and net interest margin necessary to maintain continuing operations. Minimum margin consists of two basic components: 1) earnings needed to maintain an acceptable capital ratio and pay dividends, and 2) earnings needed for overhead.
In our ever increasing efforts to educate and inform, our marketing department here at team Plansmith has been on me to contribute to our Blog. Quite frankly, I’m not really a "blog" guy, but for those of you that know me, I’m not short on opinions either. So, given that I sit here stuck on a plane for a few hours, this seems like a good time to take a shot at it.
Seems backwards to me. As George Bush (the older one) said, "The past is over". The future is unlimited. We can do nothing to change what has happened, but we can do anything to change the future.
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.
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.
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.