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Here are 8 ALM reports to help banks and credit unions manage changes

Chris Acker
August 21, 2023
Read Time: 0 min

Managing the bank or credit union

What kind of reports can your ALM model provide?

Asset/liability management professionals often ask me for advice on using their ALM model to generate reporting that will provide meaningful information to aid in financial institution management. What types of ALM reports would be most helpful for banks and credit unions to run, and why?

Below are several examples of asset/liability reports that can help financial institutions manage during a changing environment and prepare for future changes.

Beyond balance sheets

ALM reporting complements routine financial reporting

A balance sheet and an income statement certainly provide information for most banks and credit unions. But what happens in a different rate environment? What happens when interest rates are changing and the institution’s prepayment speeds also change? What happens to your financial institution’s interest margin, the balance sheet, and, ultimately, what happens to net income as these changes unfold?

We are now in the middle of some significant rate hikes. What impact has the rising-rate environment had on our financial institutions? What has happened to our net interest margin? How about liquidity? Also, we have not thought about down movement in rates for a long time as there was simply nowhere to go. But with rates moving up over 500 bps in the last 18 months, now is the time for financial institutions to look at and review all down-rate shocks, our policy limits, and how the institution is positioned.

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ALM insights

ALM reports fill regulatory and strategic needs

While reports using immediate and permanent rate shocks fill a regulatory need, they are not very useful and don’t provide much insight for the bank or credit union. Rates change over time, and not all rates move by the same amount or, in some cases, in the same direction, so their impact on the balance sheet, income statement, and economic value of equity (EVE) can be difficult to discern.

As proof, consider how rates in the last 18 months did not move immediately and permanently by 100 bps or more; they moved over time. Financial institutions need to take into account different types of rate environments and the non-parallel, inverted, flattening, and steepening curves that can play out over two to three years.

For example, if my institution has a $1 million bottom line in a flat-rate environment and interest rates run up 20 or 30 bp over the course of a year, will I see what’s happening by running a one-year forecast? Not really. I need the ability to look out for two or three years to see what the full impact of those rate changes might be. What if the rates move differently than they have been? I need the ability to run forecasts for multiple environments using different yield-curve shapes and yield-curve rate changes.

What if rates fall? A one-year report, similarly, would not allow us to see the full impact of the rate changes on liquidity, capital, and various components of the income statement. Two- and three-year reports would be better. 

That way, no matter how interest rates unfold, there is a level of comfort that the financial institution’s results will be within those produced when running different rate environments. 

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Run monthly

Set up ALM model reports once

At a minimum, your analysis for interest risk management, liquidity risk, and capital planning should include the following eight reports from your asset/liability management software. These can provide valuable insight that will help assess the impact of changes before they hit the balance sheet or income statement. An institution can use these reports to give the management and board the ability to adjust their business plan to ward off big hits in their bottom line and to seize opportunities competitors might miss.

Once any of these reports has been set up in your ALM model, using it each month is easy and reduces the chance that a setting may get missed or changed.

Asset/liability analysis

8 Essential ALM reports from your model

The asset/liability management reports and the insight they’ll provide are:

  1. Income statement run under multiple rate environments over a two- or three-year time horizon. Running this report will allow you to see the impact on the interest margin and net income as the rate environments unravel over time. These rate environments need to include both immediate and permanent rate shocks, as well as gradual and non-parallel rate scenarios.
  2. Forecast yield report. A forecast yield report will show how the yields on interest-bearing assets and liabilities move under the different rate movements. There would also be some other ratios running down to return on assets (ROA), so this would be helpful for showing the impacts of the rate changes.
  3. Net interest income volatility. This report will help your interest rate risk management. The results in this report will show comparisons of the net interest income under different rate environments. It will be clear where a potential issue might arise and under what type of rate shocks, allowing management to look at possible adjustments to help mitigate them.
  4. Forecast ratio analysis. This report will show how different ratios, yields, and funding costs are performing over a scenario under a rate environment. The analysis is very helpful when running what-if scenarios changing the balance sheet mix or exploring the impact of different rate environments. The types of ratios included are:
  • profitability (net interest margin, non-interest margin, ROA, ROE)
  • balance sheet (loans/assets, loans/deposits, and deposits/assets)
  • capital ratios (book capital/assets, Tier 1 risk-based capital, Tier 1 leverage capital, and total risk-based capital)
  1. Forecast income statement decision matrix. Much like the net interest income volatility report, this analysis runs the entire income statement under multiple rate environments for comparisons of each account line in the income statement. Also like that report, this one would help point out where issues might arise for interest rate risk management and under what kind of rate movement.
  2. Current market value. This report analyzing ALM data in your model takes your current position and runs a mark-to-market analysis of each account in the chart under immediate and permanent rates. It will show the value of each account with its current cash flows and interest rates vs. what the market is indicating the current rates are in the market; they are shocked up and down by the immediate and permanent rates selected. When complete, it shows the potential impact on the institution’s capital position in each environment. It will allow a bank or credit union to identify potential issues and provide an opportunity to adjust the business plan accordingly. Both the current market value and forecast market value can help in capital planning.
  3. Forecast market value report. Running a forecast market value report allows you to see the impact of various influences over time. You would select an interest rate environment like a non-parallel rate change as described above, along with your business plan changes for the balance sheet and income statement over time -- out three months, six months, one year, or two years. Those impacts might include prepayment slowdowns or changing interest rates on certificates, loans, and non-maturity deposits. A forecast market value report can help management and the board see if strategy changes could benefit the institution. It is an excellent tool to run multiple strategies to see if the institution would perform better or worse, given the changes in the strategy.
  4. Liquidity coverage. This report takes your current position and business plan, then runs a liquidity coverage scenario using your available cash, investment securities, contingent secondary liquidity, and contingent liquidity uses. ALM liquidity reporting will help with your liquidity risk management. The report will give you a look at how your primary liquidity ratio and total liquidity ratio will change over time. For example, you can then run a stress test to show the potential impact on liquidity of higher deposits run-off, reduction of secondary funding, or a slowdown in loan prepayments.

As mentioned earlier, once you set up these reports in your ALM model, it’s easy to use them each month for asset and liability management. Your ALM advisors can help you if you need to know how to generate reports in the ALM model. With these reports, a financial institution will be better prepared to face the interest rate risk and liquidity risk that changing times can bring. It will be able to test strategies to see what adjustments could benefit the bank or credit union as the future continues to change. Do your competitors have that advantage?

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About the Author

Chris Acker

Senior Consultant
Chris Acker has more than 35 years of financial industry experience, starting in banking. As a Senior Consultant at Abrigo, he consults with clients on interest rate risk and other ALM concerns to make ALCO processes more effective. Chris helps clients develop workable strategies and risk management processes to improve

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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