Why today’s risk managers must use their imagination and test, test, test for ALM

Asset liability management (ALM) for banks and credit unions has always been more than check-box compliance. But in today’s precarious financial environment, it’s even more important for risk managers to look beyond the rules and consider every possibility the future of banking could hold.

What that economic future looks like is a guess at best. With the recent bank closures and several other banks’ share prices under stress, the “main” root cause of these events is also a matter of differing opinions.

We’ve heard that troubled banks locked in a lot of long-term, fixed-rate assets when rates were low. Or that they held quantities of short-term, uninsured deposits. Or, perhaps, because they’d focused on a specific target customer base. Or maybe, the fact that all these red flags were present is the clear reason.

But if we take a step back, aren’t they also common to most banks?

There are more than 5,000 banks in the U.S., all looking for their own niche. Whether that’s focusing on a particular geographic location, a certain type of community or company or a specialist sort of product, there’s always a risk involved.

The point is that banking isn’t about risk avoidance – it’s about taking balanced and managed risk.

That doesn’t just mean meeting the minimum regulatory requirements. For risk managers, the real ask is to be imaginative – and continually assess where problems can surface before they become real and take effect on the balance sheet.

We are in an interesting time where rates could realistically materially move in either direction. As I write, the Federal Reserve is signaling that interest rates are nearing their peak and expect to hold rates flat.

The treasury market hopes that rates will start coming down later this year. Both can’t be right.

If the Fed is correct, long-end rates will probably at least undue the 50bps rally in March and head higher, stressing AFS/HTM exposures and new mortgage lending. Deposit pricing and attrition pressure continues.

If neither is correct, and transitory inflation remains persistent, then both short and long-term rates are headed higher. Deposits leveraged and floating rate commercial loans will be under much more, if not severe, stress. Each of these scenarios is a plausible possibility from today.

So, it’s crucial to keep analyzing the possible effects of both hikes and falls in interest rates – across interest income, liquidity and capital impacts. In fact, with the latest ALM and balance sheet management technology, you can test how both rate changes and a range of other stresses will affect the balance sheet as a whole and screen for early warning signs.

With its complete view of your balance sheet, think of the modern balance sheet management system as a sandbox where you can apply any number or combination of shocks to your bank and see how it holds up.

Thanks to highly automated workflow, a powerful calculation engine and intuitive dashboards, you can now also spend less time crunching the numbers and more on testing scenarios and solving the issues they surface.

The technology takes care of the data, the math and the mundane administrative tasks. The rest is up to your imagination.