ALM Risk in Focus

For those of you who need corrective lenses like I do – have you ever sat in the optometrist’s chair and struggled to decide which eye chart was more in focus? A or B, B or C? Sometimes, it is an obvious choice; then others, I feel that both are approximately the same and struggle to decide. Clearly, if the answer is that close, either option will work well for my ultimate goal, yet I hesitate and struggle to make a decision.

We see this in the management of credit union risk at times too. I have the opportunity to work with our credit unions, and I receive all kinds of questions about what direction is best for their institutions in terms of optimizing their balance sheet risk. Some strategies are clearly out of focus with best interest rate risk practices, while others are clear. Then there are others which are not as easily defined, plagued by complicated questions and answers that seem more like educated opinions than solutions. It makes me think about A or B…?

When it comes to ALM, I often see where policy restrictions or ALCO reports get included and, over time, no one knows their purpose. Rather than being an aid in making a clear decision, these tools are perpetuated just because. For example, GAP policy limits that may be overly restrictive and, often times, serve no real purpose. With robust tools like projected earnings and net economic value (NEV) analysis, GAP measurements do not add value to the risk profile. When you are reviewing your ALCO package, it may make sense to stop and determine if a limit is still valid, or whether a report shows the data you need to make a decision. These are the quick answers where there is clearly a right answer between A & B. It is important to keep the “must-have” data in mind because too many restrictions can cause distractions that keep your team from focusing clearly on the important measures.

In some circumstances, clear answers may not be as readily available. Where is the yield curve headed? Are the  liquidity levels adequate? How should we change the pricing on deposits to retain funding? These are those B or C moments. Even in these less delineative situations, focus on the big picture and ask, at the most basic level, what am I trying to measure? Sometimes, getting lost in the details takes us off track. On the other hand, taking a moment to refocus on your overall financial goals can help decisions become clear. Pick one possibility and get started. Is B indistinguishably more clear than C or vice versa? Either option is a good place to start, because both provide a way to get to the end goal.

This way of thinking often reminds me a of quote I like from Steve Jobs: “Focus and simplicity…once you get there, you can move mountains.”

As you navigate through this upcoming year of uncertainty, take the time to focus on the importance of clarity and simplicity. Don’t get caught in the hesitation of picking the “most clear” answer. Find one that reflects the financial goals for your credit union and move forward with it, then adjust your focus as you move forward.

Melissa Scott serves as Vizo Financial’s vice president of ALM services. In this role, she is responsible for managing and providing ALM reporting, modeling, validation and consulting services to credit unions. She is also responsible for providing ongoing training, support and education for ALM users, management and their board of directors. She also holds the designation of certified public accountant (CPA) and is a member of the North Carolina Association of Certified Public Accountants.