By Emily Hollis
When asked what takes up most of their time nowadays, many credit union CFOs might say, “Managing more comprehensive risk-management procedures.”
The financial crisis may be in the past, but it cast long shadows across the lives of credit union CFOs. In addition to their traditional responsibilities of financial reporting, treasury duties, financial forecasting and modeling, they now must offset risk and reward in a much more complex regulatory environment. The bottom line: Asset/liability management demands have become more involved and more time-consuming.
Assess the Current Situation
To achieve maximum effectiveness with ALM processes, it’s critical to perform periodic evaluations of current methods. CFOs need to ask: Are our credit union’s analyses and financial reports providing the information we need to make the right strategic decisions? How accurate are the risk assessments we produce? What about our predictions of liquidity and capital requirements?
We recommend the following guidelines to clients:
- Focus stress tests on probable scenarios, not every potential situation. Conducting complex modeling tests for every possible scenario takes a lot of resources and can complicate decision-making, wasting time and effort. Evaluate what is most likely to happen and run tests to model those events.
- Recognize the distinction between income reports and fair value reports. Net interest income simulations are fairly straightforward, and especially helpful when choosing strategies and simulating income volatility. Fair value reports assess outlier risks and reveal asset/liability effective duration mismatches, which can be detrimental in volatile rate environments when out of balance.
- Select the right ALM software. Choosing the proper software increases the ability to perform modeling that meets a credit union’s needs. Basic requirements include producing analyses of various scenarios, as required by regulators, along with more in-depth liquidity forecasts. Credit unions with more complex balance sheets could require more powerful modeling, capable of producing stochastic analyses with embedded options and the loan-level analytics required for more detailed results.
Explore Outsourcing Some ALM Tasks
New rules, more complex balance sheets and a volatile market environment are making it more challenging for CFOs to keep up with daily details, while also looking ahead and ensuring the proper analyses are being done. For many credit unions, the best solution is to seek help from outside ALM experts. An experienced ALM partner will provide guidance and assistance in areas such as investment and balance-sheet advisory services, ALM strategy, profitability analysis, and portfolio review. In turn, this frees up the CFO’s time to focus on business strategy and the credit union’s longer-term needs.
Engaging a quality ALM service provider offers a number of benefits:
- Up-to-date tools and technology – Economies of scale allow specialized ALM service providers to invest in the most current technology and tools. Working with an ALM professional gives credit unions access to leading-edge methods, without having to invest in new software, systems and other infrastructure.
- Extensive roster of experts – Because ALM advisory firms focus on their specialty, they employ knowledgeable professionals who can be relied upon to supplement a credit union’s in-house efforts and provide expert advice as needed. In addition, they will be aware of the latest regulatory changes and important market developments.
- Unbiased, experienced perspective – Contracting with a fee-based, third-party ALM advisory firm means receiving impartial, independent guidance from an expert, which is especially useful for validating assumptions. Receiving an authoritative stamp of approval also reassures boards of directors.
- Access to markets – Experienced advisory firms pay attention to the capital markets and have a comprehensive understanding of how they function. Because of networking with other firms and clients, advisory firms maintain important connections that often mean trades are executed at more advantageous terms.
Evaluating current procedures for areas of improvement and working with ALM professionals provides more extensive insight into balance sheets. Having the time and resources to pay closer attention to identified opportunities enhances credit unions’ overall financial performance.
Emily Hollis is CEO of ALM First Financial Advisors, LLC.