Real men cut their own lawns!
At least, that’s the objection I had when my husband brought up the subject of hiring someone to mow the grass. His response was simply, “You’re right darling. I’ll be sure to get to it right after chopping this wood and hunting with my bare hands.” He was undoubtedly taking the alpha man stereotype to the limit, but who am I kidding? He had me at “you’re right”. And, to be honest, down south, we cut grass 10 months of the year and our summers can leave you sweating like a long tailed cat in a rocking chair factory. So began my checkbook’s love affair with the lawn maintenance man.
For those of you who haven’t yet succumb to the local landscaper, the upcoming Spring season means you’ll have to drag out the lawn mower and start cutting the grass. Are you dreading the drudgery of the chore? Or, are you looking at it as an opportunity to spend time outdoors and get some exercise in the fresh air?
Comparing this to the banking world, we could ask a similar question about asset/ liability management. Is it something you dread or enjoy? Surely, the scale would be tipped for the majority of bank executives feeling the drudgery of this task and treating it as an obligation rather than an opportunity.
However, as Oracle Financial Services points out in its very insightful whitepaper, “Asset Liability Management: An Overview,” ALM isn’t just about protecting your financial institution from risk. ALM also “opens up opportunities for enhancing net worth.” Of course, you’re obligated to manage risk and make choices aimed at minimizing your bank’s exposure to outside threats like rising rates; but, that’s no excuse to overlook the opportunities inherent in the process.
ALM should be a comprehensive process to manage and mitigate the risks between assets and liabilities that don’t (and never will) match up perfectly for many reasons, including liquidity and interest rates. Of course, the Great Recession radically altered how many financial institutions view and execute ALM, and short-sightedness about opportunities is just one of those effects. To really achieve effective ALM — especially in a rising rate environment — financial institutions need to restructure how they think about and execute the process.
Today’s best practices in ALM include:
- Analyze your financial institution’s own current and historical data, rather than relying on industry or third-part estimates. Despite operating in the same marketplace, each financial institution’s historical data will be unique. Incorporating your own data into your ALM processes will be far more valuable than making assumptions based on generalized information.
- Stress test scenarios based on probability, not possibility. Just because something could happen, that doesn’t mean it will and modeling your ALM on assumptions that are merely potentials is a great way to waste time and money. Consider scenarios that are most likely to occur and test your asset and liquidity base against each scenario.
- Cultivate additional sources of liquidity. Explore asset classes that are both low cost and that have worked well for your FI in the past.
- Don’t depend on predictions. Instead, base actions on your actual track record. Most FIs simply don’t have the right people on hand to make accurate and effective predictions.
- Find great performance-management software to make this process easy. ALM software can help financial institutions achieve far more sophisticated and varied modeling, more comprehensive liquidity forecasting and more accurate and actionable loan-level analysis than they could do on their own.
ALM continues to change, and banks need to keep pace — starting with looking at asset/liability management as not just an obligation, but an opportunity. Just like the growing grass, asset liability management is unavoidable. The key to success is stepping back to analyze what makes the most sense for your situation and ensuring that you aren’t missing any opportunities in the greater landscape.