As Asset Liability Management (ALM) challenges arise, such as new regulatory pressures or shifting rates, it’s important that you have the strategies in place to ensure that your financial institution is prepared.
Here are four ALM strategies to help you mitigate risk and take advantage of opportunities:
- Review and update your ALM policy – this is critical to your decision making process. It provides financial risk guidance that has been approved by your board of directors. Be sure that it:
Run multiple what-if scenarios to quantify the impact of your decisions. Include:
- Clearly defines the responsibilities of the board, the ALCO, and senior management as to overall management of interest rate risk and liquidity risk.
- Addresses capital adequacy, policy exceptions, and asset allocation strategies.
- Directs the liquidity management process and the contingency funding plan.
- Addresses the frequency of a model validation and back testing of your ALM model.
- Defines your institution’s risk policy limits and guidelines.
Stress test each scenario to understand the risk associated with each financial decision.
- Decreased loan demand and cost of funds.
- Increased loan demand but higher credit risk.
- Increased capital requirements.
Establish a process for creating rolling forecasts to constantly improve the quality of the information available.
- Be sure to include immediate and ramped shocks.
- Include up and down scenarios and rate twists.
- It is best to forecast at least quarterly.
- Extend forecasted time horizons beyond twelve months, to at least 18-24 months.
Ready to take the next step and be better prepared for the future? We invite you to explore this ALM knowledge center for additional tips, resources, and information that will be helpful as you review your current ALM policies, strategies, and prepare for your next exam.