Why Your Financial Institution Needs a Playbook in 2025

The financial landscape is set to undergo significant shifts in 2025, driven by fluctuating interest rates, evolving economic conditions, and a changing political environment. These factors present both opportunities and challenges for financial institutions, making it essential to have a comprehensive playbook. A playbook not only provides guidance, but ensures that institutions remain agile and focused on key objectives, especially during fluctuating rate environments. While we don’t know how much rates may fluctuate, we do know it’s important to be prepared for any scenario.

A Playbook Supports Core Objectives

Every organization relies on achieving key objectives to succeed. A well-defined playbook is crucial for aligning teams, tracking progress, and ensuring everyone is working towards common goals. This documented plan outlines actionable steps, facilitates accountability, and helps identify and mitigate potential challenges.

In every economic environment, three core objectives that every financial institution should consider including in their playbook are:

1. Preserving or Increasing NIM
2. Prioritizing Balance Sheet Flexibility
3. Regulatory Compliance

NIM as a Playbook Objective

For example, one core objective of every financial institution is preserving net interest margin (NIM). Whether the organization is simply fighting to maintain NIM or is ambitiously projecting to increase it, this is a quality objective to track on an annual playbook. While NIM is always an important measure, fluctuating interest rates necessitate a close eye on compressed margins. Preserving or enhancing NIM requires institutions to manage both income and expenses with precision. A robust playbook can help institutions create a strategy to protect NIM, including Dynamic Loan and Deposit Pricing, Leveraging Hedging Strategies, and bolstering creative thinking to uncover previously undiscovered opportunities. Additionally, a playbook can help foster team brainstorming to go beyond Margin and consider ways to proactively navigate rate changes to enhance their bottom-line, such as expanding revenue streams by diversifying into fee-based services or alternative lending models to offset margin pressures.

A specific objective for the playbook could be to increase NIM by 25bp by year-end. Achieving this objective might involve specific initiatives for several departments, such as marketing to attract higher-value deposits, commercial and residential lending departments to drive profitable loan growth, and retail banking to optimize service delivery and identify opportunities for additional products. With clear action items assigned to each department and their respective leaders providing oversight, a playbook ensures a coordinated effort towards achieving the shared objective. Then, during corporate meetings, the playbook can be discussed as a group to identify successes and address any potential roadblocks or delays.

Balance Sheet Flexibility: A Key to Thriving in a potential Declining Rate Environment

With a new political mix in both the executive and legislative branches, uncertainty looms in the economic and financial sectors. It remains unclear what the overall effect will be on interest rates. The general consensus seems to be that rate changes may continue to slowly drift lower, but will likely not shift sharply.

Declining interest rates can compress margins, but they also present unique opportunities for financial institutions. Lower rates often bring access to lower-cost funding options and opportunities to reprice assets and liabilities for optimized returns. Balance sheet flexibility becomes crucial, enabling institutions to reprice funding sources, optimize asset liability management, and seize market opportunities, such as expanding high-demand lending products or hedging against interest rate fluctuations.

Regardless of the exact track all of the financial factors will take, being prepared to thrive in any environment is the best course of action. By prioritizing balance sheet flexibility, financial institutions can adapt quickly to changing conditions and maintain their competitive edge. The best way to intentionally plot out balance sheet flexibility into a true plan is to create strategic objectives around it and outline them in a playbook.

Regulatory Compliance and the Playbook

Financial institutions are not new to examiner scrutiny. Over the past decade, regulators have become stricter with policies and expectations, and organizations feel the pressure. In order to comply, financial leaders have taken several approaches: hire staff to competently handle compliance in-house; outsource fundamental compliance tasks, like interest rate risk and asset liability management; or, adopt a blend of in-house and outsourced compliance management. This choice in itself is a strategic objective, and organizations should closely manage their approach to regulatory compliance to ensure smooth exams and operational efficiency. By including targeted objectives, initiatives, and action items in a playbook, the organization can confidently prepare for examiners.

Furthermore, when institutions combine a focus on regulatory compliance and balance sheet agility with targeted strategies for NIM, they can thrive even in challenging economic conditions. For example, although we may see shifts in rates and other economic trends, regulatory scrutiny, particularly related to liquidity, is not likely to let up. Having a strong grasp on balance sheet movement, including liquidity program management, will help organizations remain competitive in their respective markets, but also in compliance with examiners. A playbook will guide this process and keep teams on track.

Why a Playbook is Essential in 2025

A financial playbook acts as a roadmap, outlining strategic action items to significant corporate objectives, including, but not limited to, market scenarios. This becomes particularly important in an environment marked by uncertainty. A well-designed playbook can ensure institutions are prepared to: handle interest rate volatility; adapt to economic and regulatory changes, including consumer behavior; and keep the entire team aligned and focused toward the same goals.

Components of a Strong Financial Playbook

1. Scenario Planning: Include proactive strategies for multiple market conditions, such as declining or rising interest rates.
2. SMART Objectives: Using a playbook, you can efficiently develop action plans that are Specific, Measurable, Attainable, Relevant, and Timely.
3. Performance Metrics: Identify a few vital KPIs like NIM, loan growth, and efficiency ratios. Then, create objectives around them to track progress.
4. Risk Mitigation Plans: Detail approaches for managing areas of risk, including interest rate risk, as well as credit, market, and operational risks.
5. Regular Updates: Ensure the playbook evolves with market conditions and internal priorities.

How Plansmith’s Budget Playbook Tool Equates Success

Plansmith’s powerful solutions help financial institutions create and implement their playbooks effectively. With our Budget Playbook, organizations can quickly and easily map out their strategic vision in a simple online format. Then, built-in functionality for automatic notifications to update the plan can be sent to each objective owner, ensuring seamless communication. However, as we’ve discussed, the playbook itself is only one piece of the puzzle. As our modern economic environment continues to grow more complex, financial leaders need dynamic software to model twists and turns before they happen.

Your model functionality should include:

• Instrument-level and Multi-unit Budgeting: Your budget can be built to mirror your organizational hierarchy.
• Forecasting and Scenario Modeling: Develop detailed plans to navigate rate changes and economic shifts.
• Interest Rate Risk Management: Assess exposure to rate fluctuations and implement strategies to protect margins.
• Stress Testing: Identify vulnerabilities through rigorous testing of financial plans under adverse conditions.
• Performance Tracking: Monitor data via daily using dashboards to measure progress toward playbook objectives.

Conclusion: Prepare for 2025 with a Strategic Budget Playbook

It’s clear that 2025 promises both challenges and opportunities for financial institutions. Focusing on developing a comprehensive, adaptable playbook ensures readiness for economic changes, interest rate shifts, and regulatory developments. Furthermore, by prioritizing balance sheet flexibility and NIM preservation as central objectives, institutions can proactively work to position themselves to thrive in a declining rate environment.

Start building your 2025 playbook today to capitalize on opportunities and protect your institution’s success. Plansmith is here to provide the tools and support you need to navigate the year with confidence. Click here to schedule a discussion today.