Asset & Liability Management Back on the Agenda
Michael Georger is a Director at FCG who is a 30+ year Experienced Treasury and Asset & Liability Management (ALM) Professional responsible for supporting and building advisory development and sales. He has worked directly in Treasury for several large international banks (in New York, London and the Nordics) and has also led large treasury and risk consultancy projects in the UK, Nordics and across Europe with regulators, exchanges, banks, asset managers and corporates.
Finally, upward rate movement from inflation is making ALM greatly important again
After many years of cooling off from the 2008 financial crisis with low rates, lower inflation and credit recovery, the financial markets seem to heading into a new cycle. That new cycle brings the eventual dreaded inflation cycle and possible implications to our healthy mortgage, property and overall credit and funding markets. With a new interest rate and market cycle upon us, banks and financials can also consider it an opportunity to position themselves in pricing and servicing value to their customers.
The trading and securities markets generally don’t like bearish, inflationary rate rising markets. It’s much more straight forward making money in bull markets with low interest rates. However, traders have already or will reposition their activities and posturing based upon what is selling, is cheap and where they view they can make money. For the tradition loan and deposit player, the cycle change means property value and lending activity are more expensive borrowing means less lending driving the demand down for properties as average customers can afford less monthly payments. That being said, banks can also look at rising rates to rebalance their pricing against peers, and thus increase market share and overall margin return.
This pricing and margin adjustment is nothing new for our retail and corporate bankers. However, the last 10 years or so have yield little opportunities for strategy change under low, falling and at times negative interest rates. Consequently, this has resulted in banks keeping their pricing the same and have not had to robustly manage potential rate rise and cycle threats. Not to mention the odd dynamics that negative rates have to deposit customers and also funding markets.
What it also means is that historic customer behaviour over the last 10 years or so does not really apply to the potential new rate and economic cycle. We need not delve too far into the implications from regional conflict and COVID implications to funding, loan markets, securities and inflation in general to understand the need to be prepared for change that might not have happened in previous data experiences.
There is insight to be captured from studying our customers and customers in the overall market. But the resulting investment, borrowing and price behaviour in the recent past will likely not tell what the customer will do next. What is next to come for future customer behaviour is dependent upon what drives peers, markets, customers and our business strategy and plan. The players who are on top of drivers and key performance measures in decision making will most likely come out more prepared to successfully evolve in the cycle change.
Many factors such as different investment alternatives, potential pricing opportunities from market entrants or existing large players, equity and fund volatility increases have increased customer interest in safe deposits. Also, the need for more conservative budgets and spending by customers and many other factors will become increasing more important in loan and deposit forecasting, margin and value based management. For example, sudden increases in interest rates will increase deposit interest rates while fintechs and all deposit maker players can correspondingly take the market rate rise to offer a more attractive rate and position against their peers. At the same time, banks need to manage the overall margin effect and the risk to further stresses. Of course, banks will need to adjust their models and measurements for the future and how they manage the bank risks to their business plan against that future. What is certain is that the past customer relationships used in pricing policy and risk perception will no longer match what we need to measure in taking future decisions on margin and value.
So, what can we do about this rate and credit cycle change?
- Ensure robust actionable governance is in place to steer the balance sheet, margins and take actions on pricing, customer management and product solutions against our peers
- Ensure our precious margin and risk measurements actually consider future expected behaviours with adequate downside and upside measurements considering rate changes
- Govern and review our assumptions via management and committee approval for basic sensibility with the business plan and reasonable / stress risks to our plan– validators tend to not understand or have true mathematical approach to handling ALM assumptions due to historic based approaches
- Ensure the business who owns and manages margin, pricing and customer is aligned to how the bank performs to peers and the bank as a whole to the market – FTP, EC and liquidity shortcomings should all be understood and measured with active management on those on a bank-wide level
- And please don’t just rely on the clever modeler to tell you how the past relationships worked, work with our talented resources to create a forward looking, robust approach that supports logic decision making for expected and unexpected scenarios with the plenty of time to plan and execute for all outcomes
- Don’t be afraid to project logical outcomes for future rate, peer, customer, fintech, product change, eventually change will happen as all economists say it does
- In short, bring back good ALM with future adjustments for behaviour, pricing, customer management and market positioning to ensure a sustainable organization
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Michael Georger is a 30+ year Experienced Treasury and ALM Professional responsible for supporting and building advisory development and sales, working as a Director at FCG. Michael has worked directly in Treasury for several large international banks (in NY, London and the Nordics) and has also led large treasury and risk consultancy projects in the UK, Nordics and across Europe with regulators, exchanges, banks, asset managers and corporates.
Partner & Head of GRC Advisory Sweden