Many financial institutions view asset/liability management (ALM) strictly as a regulatory requirement. From a functional standpoint, ALM helps financial institutions make decisions on what loans, investments, and borrowings the financial institution should pursue, as well as the rates to offer, in order to make profitable loans while mitigating risks. Financial institutions that run ALM models specifically to comply with regulations will often look at risks like credit risk, interest rate risk, and some liquidity testing. But are we actively managing risk, or are we measuring and attempting to mitigate potential risks without necessarily thinking about profitability and opportunity today, asked Dave Koch, Managing Director of Advisory Services during a recent webinar.
The ALM process can be so much more than simply “checking the box” to meet regulatory requirements. Rather, with a dynamic ALM process, financial institutions are able to inform sound decision-making in both strategy and risk. When done correctly, a dynamic ALM provides the right guidance on profit maximization versus risk. There is significant room for improvement in this area for most financial institutions. A recent informal poll asked 100 CEOs and CFOs if they use their ALM results and models to guide decision making, and approximately 70% indicated that they did not. During the webinar, half (51%) of respondents answered that their financial institution used a static approach to their ALM model, and 38% responded that their FI did indeed use a dynamic approach.
So, why aren’t more financial institutions using ALM as a decisioning tool if they already have a tool for ALM? One of the most common reasons is a lack of time and staff available to dedicate to ALM. Financial institutions want to make a decision quickly, and many do not have the personnel or models to drive those decisions. Another setback is the viewpoint that the ALM process is viewed as a “regulatory requirement” and not a “profit center,” Koch noted in the webinar. With no regulatory push to do so, financial institutions do not have the external incentive to use ALM as a decisioning tool.