Goldilocks and the ALM Model

Goldilocks and the ALM Model

Do you remember the story of Goldilocks and the three bears? You know, the one where a little girl happens to find the home of three bears in the woods. She goes inside and eats their bowl of porridge. One of the bowls of porridge is too hot; one is too cold; and one is just right. Then, she tries out their chairs and beds; all of which brings her to the same conclusion – there’s only one out of each that fits her just right.

Well, your credit union may be facing the same predicament as the little girl, Goldilocks, when it comes to your asset liability management (ALM) model. Recent events have brought ALM back into the spotlight, and they may even have you questioning if you should refocus your priorities to evaluate this critical component of your credit union’s financial analysis. Is your model still really the best fit? Should you evaluate other options? Is your model sunsetting? Do you need to search for a new vendor?

These are all great questions to ask, especially now. And while asking and answering these questions may be easy, choosing the right ALM model may not. Between the vast number of vendors and solutions, choosing an ALM model that fits your credit union just right can be a difficult task. So before deciding which model best suits your credit union, consider two things.

  1. What is the complexity of your balance sheet?
  2. What model functionality are you looking to leverage?

You may not be able to answer those two questions off the top of your head, but the following items will assist you in this evaluation, as well as provide some potential questions that you can pose to vendors.

  • Product attributes – Be sure the model that you choose can handle, not only, the products you currently have, but also future growth into new areas as well. For example, ARM mortgages or Consumer Balloon loans bring unique repricing attributes that should be effectively measured in the model. Utilizing a model with the functionality to handle these attributes will allow you to implement a successful asset/liability strategy because it will accurately reflect the unique product structures.
    Ask vendors: How does the model handle balloons and ARM products?

  • Flexible cash-flow modeling capability – Comprehensive cash flow and repricing control is essential because of the optionally found in many balance sheets. Monthly repricing and cash flow parameters should be available for each category in a variety of rate scenarios. This is a vital aspect to get right during the selection process because of the impact it has on the earnings simulation and net economic value (NEV).
    Ask vendors: Can you provide a detailed explanation of the cash-flow model?

  • Quick quarterly report and simulations – This is a major component to think about because it’s extremely important. The model must have the capabilities of running quarterly reporting and simulations for both balance sheet shifts and forecasted liquidity in a timely fashion. When your model has this, you will be able to manage your risk levels and be proactive rather than reactive. This can either be accomplished with an in-house or outsourced model.
    Ask vendors: What are the average turnaround times for quarterly modeling, forecasted liquidity and simulation reporting?

  • User-friendly – Data extract, download and input capabilities are key to efficiently running an ALM model with minimal time commitment from credit union staff.
    Ask vendors: Can you provide a complete list of the files that are required for modeling, as well as an estimated time commitment for staff?

  • Comprehensive support – Vendor strength and user support are significant elements to consider when selecting an ALM solution. You need to ensure that the analysts are knowledgeable while simultaneously able to explain the results in a way that you can understand. Afterall, Albert Einstein put it best when he said, “If you can’t explain it simply, you don’t understand it well enough.”
    Ask vendors: Have the analyst explain to you the earnings simulation and the NEV in the same way that they would for a new ALCO member.

  • Price – The model should be available at a sensible price; and the credit union must be prepared to dedicate sufficient resources to get the model up and running in a reasonable amount of time.
    Ask vendors: What items are included in the base price? What’s the cost for optional or add-on services offered? Comparing these aren’t always easy to do between vendors, so be sure to evaluate the services included when evaluating the cost.

Your ALM model is imperative to your credit union’s financial success, which is why you should put in the time and resources to find the vendor and solution that fits your credit union just right. When considering an ALM model, be sure it is comprehensive and powerful enough to analyze all of the balance sheet behaviors found in your credit union’s balance sheet. Look closely to see if each ALM model is functionally capable of capturing all key repricing and maturity behaviors of your balance sheet; use the above as a guide to decide what aspects are important to your institution during the decision-making process. Goldilocks didn’t settle for “good enough” and neither should your credit union.

We’ve seen a lot of balance sheets and models, which is why we’re able to evaluate and help credit union’s talk through the merits of various models. If you would like more information on choosing an ALM model or would like information on Vizo Financials’ ALM Direct Modeling Services, contact and let us help you find the right fit.

Want to know more about our ALM Services? Melissa will be hosting a Simplifying ALM for Your Credit Union webinar on August 15, 2023, at 10:00 a.m. ET. Get all the webinar details, including registration information, on the event page or visit

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.