ALM Conference Toronto May 2019 David Green Advisors

ALM Conference – Toronto – May 2019

Seasoned Perspectives on the Past and Future of ALM

I am honored to have participated in Risk’s ALM Conference in Toronto at the end of May.  Along with several experienced ALM managers, FTP managers and consultants (June Wang, Karl Rubach, Hovik Tumasyan, Randy Ahluwalia, and Alex Shipilov), delegates were entertained with intense discussions around the evolution of bank risk and profitability management.

There was considerable agreement that interest rate risk and liquidity risk management are more difficult than ever and that FTP is essential to consolidating these risks into a central mismatch unit for which ALCO must be held accountable.  Of course, FTP is not the end of risk and profitability management; once meaningful FTP spreads have been calculated at a transaction level, banks are compelled to think through their capital attribution methodologies in order to have economically-robust measures of ROE with which to make critical capital allocation decisions.

I am looking forward to the next Risk Training event at which I will be presenting:  Deposit Modeling, NMDs and the Treasury which will be held in New York at the end of August.  At this event, I will be discussing the NMD model I developed; this model is designed to be run by/for the bank each month in order to provide real-time feedback on the validity of key behavioral assumptions.  In addition, the NMD model contains a comprehensive FTP engine – it computes FTP rates on NMDs over the complete time-series of historical data which is provided for analysis, the current position balance each month as well as any number of pro forma scenarios.  The latter capability was developed to 1) ensure that budgeted and forecasted FTP rates (spreads) are produced using the same engine used to calculate current position FTP rates (spreads) and 2) demonstrate the effectiveness of the embedded FTP methodologies at immunizing deposit products against interest rate and liquidity risk.  This model has proven to be extraordinarily valuable to bank clients as it clarifies the absolute and relative economic value of each unique NMD product and it compels deposit gatherers to be fully aware of the relationship between behaviors and value.

I hope to see you in August in New York.

NMD Workshop Chicago May 2019 David Green Advisors

NMD Workshop – Chicago – May 2019

NMD Model Framework NMD Workshop Chicago May 2019 David Green AdvisorsA Methodical Approach to Developing and Managing a Model of Non-Maturity Deposits

Thanks to everyone for attending my latest NMD Modeling workshop which was held in Chicago at the end of May.  Several banks from across the US and South/Central America were represented.

The workshop began with a discussion of the problems of interest rate risk, liquidity risk and profitability management, each of which requires that well-defined assumptions be established around the behavior of NMDs.  In order that these problems be addressed consistently, I showed that any deposit modeling solution must speak simultaneously and consistently to their requirements.  Model development and model maintenance will also only be effective if they exist within a comprehensive and well-defined NMD framework.

Delegates were provided with a demonstration of my NMD model.  The model is used to produce re-pricing and liquidity cashflows for any ALM modeling exercise.  In addition, the model contains its own FTP engine which is loaded with historical and forecasted basis-adjusted swap curves and liquidity premiums (consistent with a financial institution’s choice of funding curve components).  With this information and the estimated cash flows, the model calculates FTP rates for each modeled product over the entire time series of historical data as well as a forecast horizon.

Delegates were able to see that when NMDs behave as anticipated, FTP spreads are stable; conversely, when behaviors deviate from expectations, FTP spreads widen or narrow accordingly.  When FTP spreads from the model have been loaded into a budget or forecast, such deviations get the immediate attention of product management as well as the ALM manager; both are incented to determine why behaviors have deviated from expectations.  To the extent that they cannot be brought back into alignment with expectations, model re-calibration is required.

Unique to the space, the NMD model is designed to be operated every month.  The notion that a behavioral model for deposits need only be calibrated once a year or on some pre-determined schedule is ludicrous.  With a financial institution’s equity levered to NMDs as much as 7-8 times, behavioral deviations must be identified immediately if an institution is said to be in control of its earnings and risk.  The last couple of years have been testimony to this fact as we quickly transitioned from an environment characterized by excess liquidity to one where deposit demand  suddenly pushed up rates on most products.  Just as importantly, as we revert to a decreasing rate environment, we will see that many banks and credit unions will not realize how quickly they need to cut deposit rates in order to protect product and bank margins.

For information about upcoming workshops, see NMD Workshops.

For information about my NMD Model, see