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 nmdmodel.com.


ALM Workshop New York Feb 2019 David Green Advisors

ALM Workshop – New York – Feb 2019

Are you ready for the next move in rates and liquidity spreads?

Thanks to Marcus Evans and the delegates to my recent ALM Workshop in New York for another exciting discussion about the role of FTP in quantifying and managing IRR, LR and profitability.  I think everyone came to see the logic and benefits of analyzing risk and profitability (at banks, credit unions and levered FIs) in a consistent and economically robust manner.

We discussed at length the benefits of using an ALM/FTP model that allows for transaction-level FTP calculations AND which can evolve FTP rates on existing AND new business into the future across any hypothetical interest rate and liquidity cost scenarios.  Stand-alone FTP systems generally fail in this regard, but well-designed ALM models should handle this with ease.  Coupled with dynamic behavioral models which naturally support the calculation of FTP rates, this alignment allows for the comparison of the (slope of the) risk profile of the FI with that of the mismatch center which is necessary to prove that the business units have been immunized from IRR and LR, risks over which they otherwise have no control.

I hope to see you this coming week at my NMD Workshop in London!


ALM Workshop Santo Domingo Feb 2019 David Green Advisors

ALM Workshop – Santo Domingo – Feb 2019

Wow, I had an amazing time at my ALM workshop in Santo Domingo (and in Punta Cana afterward!).  I want to thank all the delegates (representing all the major banks from the DR) who participated.  It was an honor to share with them my vision for a comprehensive risk and profitability management framework.

Its interesting that in a country WITHOUT a functioning interest rate swap market and with a very illiquid and short term debt market that banks recognize the importance of FTP more than most do in the US.  I believe this is the case because interest rates and the cost of liquidity are highly volatile which severely challenges the computation and analysis of business segment and product-level earnings.  In contrast, in the US, the lack of rate and liquidity spread volatility has created a sense of complacency at most FIs; low volatility makes it relatively easy to forecast earnings no matter how simplistic or illogical the margin attribution process.   When volatility returns to rate and liquidity markets, there will be many FIs that will be surprised by the impact this has on earnings.

The Fed (the regulatory side) should be careful of the unintended consequences of what the Fed (the monetary policy side) has done.  They and the OCC published their first and only guidance on FTP in 2016 (OCC 2016-7a).  It is technically only applicable to banks with total assets in excess of $250 bln (about a dozen firms); I suppose it doesn’t matter that smaller banks should not be able to quantify how much money they make from IRR and LR.  Regulators mistakenly believe that FTP is only about dividing up the earnings pie and has nothing to do with risk recognition.  Once you realize that FTP quantifies how much an FI makes by taking IRR and LR, its not a stretch to see that if IRR- and LR-related earnings are understated (at most banks the overwhelming tendency is to overstate lending and deposit gathering margins), management can be easily deluded into thinking that it has little exposure to IRR and LR.

In the workshop, we also discussed methods of imputing a base funding curve and a liquidity spread curve.  While this remains a material challenge for all the banks in the DR (and many other LatAm countries as well), I believe that these rates can be reasonably estimated.  Perhaps the systemic benefits of having a clearly-defined interest rate swap curve and a senior, unsecured term funding curve will compel the central bank and treasury department to instigate development of deep and efficient markets for risk transfer.

I am looking forward to working with the banks there to design, develop and implement robust analytical frameworks for risk and profitability.  No doubt, it will be much fun.

Of course, I am also looking forward to returning to Punta Cana where I can doodle in the sand.