David and Omar ALM Workshop at Sagicor Bank Feb 2020

ALM Workshop at Sagicor Bank in Jamaica

I’d like to thank Omar Brown and the rest of the management team at Sagicor Bank in Kingston, Jamaica for inviting me to provide a 2-day ALM Workshop.

Attendees included executive management, members of ALCO, the heads of major lending and deposit gathering business units and numerous others representing various risk and profitability functions across the bank.

As is the case in many countries, interest rates in Jamaica have declined substantially in recent years; disciplined management of both sides of the balance sheet is critical to maintaining profitability and minimizing risk.  More importantly, in the absence of well-developed interest rate swap and bank debt markets, interest rate risk and liquidity risk must be managed primarily through the structuring of loan and deposit portfolios.

With a well-developed FTP framework, the business units and Treasury are compelled to work together to find the optimal mix of product features that maximize profitability and minimize balance sheet risk.

It was an honor to share my perspective on this exciting subject.  If you are interested in learning more about our workshops and how they can be of value to your organization, do not hesitate to reach out.

ALM Workshop at Sagicor Bank Feb 2020

FTP Workshops David Green Advisors

FTP Workshops Q3 & Q4 2019: San Francisco, Mexico City & Atlanta

Announcing The Following FTP Workshops For Q4 2018:

With interest rates quickly changing direction, many banks are finding that their processes for computing and forecasting product- and business segment-level profitability are producing more noise than signal.  This is not a good situation with budget season just around the corner.  You have probably already figured out that poorly-developed FTP methodologies (which do not properly hedge interest and liquidity risk in loans and deposits) make it extremely difficult to manage earnings at a granular level.  Furthermore, improperly constructed FTP methodologies create unnecessary and unproductive tension between Treasury and the business units when mutual support and collaboration is required.

Join me for an exciting 2-day session where we explore the purpose and practice of FTP.  We will discuss the use of FTP to identity, price and transfer interest rate risk and liquidity risk from the lending and deposit gathering business units to a central mismatch center, and we will explain how to develop a funding curve which reflects contemporaneous hedging costs as well as the meaning of the earnings in the mismatch center (despite what you may have learned, they are NOT the result of an arbitrary tax on business unit earnings!).

We will also address the unique challenge of modeling NMDs.  I am excited to present my NMD model which has an embedded FTP engine that is designed to ensure that the treatment of deposits is consistent in all risk AND profitability management exercises.  Most importantly, the FTP methodology within the NMD Model has been specifically designed to produce FTP spread stability when deposit providers actually deliver deposits with the behavioral characteristics they have promised.  (If you can’t say this about your approach to managing NMDs, then you must acknowledge there there is no way to hold the deposit gatherers accountable for the quality of the deposits they deliver; this is not good when competition for deposits heats up.).

Come see why DGA clients have come to appreciate that FTP is the most overlooked and under-appreciated business management process in banking  today.  They know that regardless of size or charter type, FTP is mandatory if you want to understand and explain the level and volatility of earnings at any meaningful level of granularity.

Don’t miss this opportunity to learn how to dramatically improve the story of how your depository institution makes money!

For more information about the workshop, see Funds Transfer Pricing: The Key to Effective Risk and Profitability Management.

Delegate testimonials can be found here and if you have any questions, please feel free to send me a message.

I hope to see you soon.


ALM Workshop Miami Jun 2019 David Green Advisors

ALM Workshop – Miami – Jun 2019

Preparing for a Change in the Direction of Interest Rate Movements

I want to thank the delegates from banks in India, Puerto Rico and the US who attended my workshop in Miami this week.  (As promised, mojitos were served and they were delicious – the fresh sugar cane was a nice touch!)

We began the workshop with a review of the history of interest rate and liquidity risk, highlighting lessons learned in the S&L crisis in the 1980s, the rapid decline in rates following the dot-com bubble, the subsequent run-up in rates from 2004-6 and in the liquidity market shutdown in 2008-9.  It’s good to have a sense of these events especially as it has been some time since we have experienced a material move in interest rates or the price of liquidity.

Interest rate risk management continues to be a key focus at institutions around the globe, especially as the Fed is quickly pivoting from increasing rates to decreasing rates and the ECB is threatening to take the overnight deposit rate even lower (as if negative 40 bps is not low enough or how zero-rate retail deposits can become an increasingly expensive source of funding).  Organizations that have worked hard to create asset-sensitive balance sheets are bound to discover that the decline in floating-rate loan and bond yields will happen quickly; in the absence of effective and substantial hedges, deposit rates will need to be cut drastically (think beta equal to one) in order to mitigate downward pressure on margins.

I also demonstrated how the FTP engine contained within the behavioral and pricing model for non-maturity deposits I developed produces FTP rates that send an immediate signal to deposit gatherers that customer rates (on certain products) must be reduced quickly if deposit spreads (and bank margins) are to be protected.  I contrasted the benefits of this model with the tendency of organizations to focus on the growth of deposit volumes as a proxy for the value of their deposit franchises; these organizations will almost certainly be too slow to lower deposit rates or will be confused about which deposit rates to lower; their shareholders will not be pleased!

We followed the model demonstration with an extensive discussion on the theory and practice of FTP which highlighted the need to model the earnings AND earnings risk profile of the mismatch center; this requirement creates the tension necessary to insure that all lenders have been charged for the interest rate and liquidity risk they create and that all deposit gatherers are properly compensated for the hedging power (or lack thereof) of the deposits they bring.  The key benefit of this tension is three-fold:  lenders and deposit gatherers are immunized against interest rate and liquidity risk, interest rate and liquidity risk are more accurately and completely measured and ALCO can be held accountable for how effectively it manages these risks.  By the end of the discussion, everyone in the room understood the benefits of a complete and well-functioning FTP framework.

For information about future workshops, my Events calendar has been updated through year-end.


Behavioural Modelling for ALM with chapter by David Green

A Guide to Behavioural Modelling for ALM

I am excited to announce the publication of A Guide to Behavioral Modelling for ALM by Matteo Formenti and Umberto Crespi in which I contributed a chapter entitled Acknowledging the Elephant in the Room: The Mismatch Centre.

My Chapter Summary:  This chapter will explain how interest rate risk (IRR) and liquidity risk (LR), which are innate to every levered financial institution, create a profitability management problem that can only be solved within a comprehensive and well-functioning funds transfer pricing (FTP) framework. It will be demonstrated how the introduction of FTP produces a new business unit, the mismatch centre, which is a true profit centre that must be analysed and managed as rigorously as any other lending or deposit-gathering business unit if granular earnings attributions are to have economic integrity. The chapter will discuss the implications for risk and profitability management when the mismatch centre is ignored or arbitrarily manipulated, eg, when its earnings are forced to zero. Implications for risk governance, the development and use of behavioural models for non-maturity deposits (NMDs), risk and profitability management systems and regulatory considerations are also addressed.

For a full description of the book, including a complete chapter listing and purchase details, visit Risk Books.