12
Wisconsin Community Banker
November/December 2014
Manage Risk, Reward with ALCO
Mary Lou Santovec
B
anks are in business to make
money. And bankers are paid to
take risks. A bank’s
asset/liability com-
mittee (ALCO)
helps ensure man-
agement is able
to make money
without risking the
bank’s safety and
soundness.
At the Community Bankers of
Wisconsin Management Conference
& Expo in September, Jim Broucek,
former regional CFO of a Michigan
bank and now senior manager of the
strategic advisory team in the financial
practice group at Wipfli LLP, spoke
about the current state of asset/liabil-
ity management.
Banks are facing both interest rate
and liquidity risks. Managing these
risks is more of an art than a science.
Is your bank being compensated
appropriately for the risk that you’re
taking and the impact those risks have
on your organization? If not, what can
you change while being mindful of
your contractual obligations?
Mother always said not to put
all your eggs in one basket or you’ll
risk a lot of broken eggs. ALCO and
mom have a lot in common. Whether
operating at the management level
or the board level, ALCO is charged
with giving direction, overseeing, and
managing risk. Taking into account
capital, liquidity, and market sensi-
tivity, ALCO helps set limits on the
maximum amounts in the major asset/
liability categories and assumptions
for the likely behavior of the contents
of those categories, as well as the
future and how to help manage it.
Improving the ALCO Process
The ALCO process is ever-evolving.
How do you measure the impact of
your decisions and show the progress
you’re making to your board and the
regulators? One way is to take a his-
torical look before determining how
you will measure it in the future.
Are you comfortable with the level
of interest rate and liquidity risks that
you have today? How does your future
strategy impact this?
Some things to consider: how much
liquidity does your bank need, how
do you measure liquidity and how
will future originations be funded? If
you’re counting on using your check-
ing account balances to fund a $5
million loan, understand that you’d
need 5,000 checking accounts with a
minimum of $1,000 in each of them to
be able to make that loan.
Deposit growth funds asset growth.
Is your deposit growth supported by
the appropriate deposit pricing strate-
gies? “Your excellent service won’t
bring in more people,” Broucek said.
Deposit pricing has to be a lure to get
them in the door — but it shouldn’t
penalize your existing customers.
How much capacity does your
organization have to grow loans
and deposits? Balancing your bank’s
capabilities could include adding extra
loan officers. The ALCO will need to
know what you expect the estimated
margin on incremental growth strate-
gies to be.
Do you project the impact of
growth strategies on your bottom line?
Do you like the financial results? If
not, what can you do to realistically
change the results? Each bank has its
own risk comfort level.
All the numbers or assumptions
that go into the risk/reward equation
change the outcome. No crystal ball
will tell you what’s going to happen
to your balance sheet if things remain
stable or if interest rates go up. With
the potential for rising interest rates
on the horizon, bankers must ask
themselves where they want to go
when those rates ultimately go up.
There are always new products to
offset rising interest rates. But rolling
out new products takes IT support.
Make sure you have the capabilities
before you launch. Don’t forget that
with loan and deposit pricing, your
bank won’t be able to move on a dime
when the interest rate climate changes.
Whatever you do, make sure you
can tell your story and the reasons
behind your decisions to the ALCO,
to your board of directors, and to the
regulators. When you put a number
on paper, it’s just a projection.
Regulators may not have been
aggressive before the 2008 crash but
their perceptions on risk have changed
and their behavior along with it. The
regulators really want to know that
you’re trying to manage risk, Broucek
noted. They love to see documentation
and dialogue in the minutes of the
meetings.
If the regulators are concerned,
they’re going to ask you to do things
that might be painful. Since an ounce
of prevention is always better than
the need to cure, think about what
you would like to improve. Because a
model can be made to say anything,
• If you need to roll out new products, do you have IT support to
meet the deadlines established?
• ALM is an art, not a science.
• Make sure that you can tell the story to the ALCO, to the BOD,
and to the regulators.
• Being able to think about what you would like to improve
and having a plan should be easier than having the BOD or
regulators tell you what to do.
• Review improvements with regulators
before and after the change and take
credit for improvements.
