Courses - David Green Advisors

FTP ALM Workshop May 2022: Live in Nashville and Webcast

After two very long years of Covid-motivated webcasts, DGA is excited to announce the return of our live, in-person workshops. We have desperately missed these events and cannot wait to be back in front of a live audience. We are returning with our course on the integration of FTP and ALM which will be held in Nashville, TN (our new home) on May 18th-19th. For those unable to attend in person, the workshop will also be webcast.

For the first time in almost two decades, interest rates are poised to rise quickly and significantly. The last time this happened, from 2004-6, the Fed Funds rate was raised by 425 bps; a severe financial crisis ensued which saw the failure of almost 500 banks. While financial institutions are thought to be considerably stronger with regard to the sufficiency of capital and liquidity, we cannot help but ponder their preparedness for interest rate risk. After almost 15 years with interest rates at or near zero, there is a new generation of bankers and risk managers who have never worked in a high interest rate environment, much less been asked to navigate their institutions through a rapid transition from low rates to high rates. Are there organizations truly prepared for what is to come?

Most banking organizations continue to be challenged in their efforts to coordinate risk and profitability management exercises; more specifically, the contribution of interest rate risk and liquidity risk to the earnings story continues to be ignored. Regulators have yet to compel banks to make this critically important connection. Excepting OCC 2016-7a, which is only applicable to banks with total assets in excess of $250 bln, there is no requirement that a bank properly attribute some portion of earnings to interest rate and liquidity risk. In practice, these sources of earnings are usually misattributed to lending (more so) and deposit gathering, leading to an overestimate of their contribution to total earnings.

When the true source of earning is not understood, during periods of economic volatility, confusion will reign. Products which were anticipated to be profitable will suddenly appear not to be. The search for reasons will eat up valuable time and resources which are otherwise needed to deftly manage the change in the economic environment.

In this timely workshop, we discuss the requirements for an integrated risk and profitability management framework which will always provide clarity around the sources of earnings, much needed clarity during periods of economic upheaval.

For more information about the workshop, see Integrating FTP with ALM: Ensuring the Alignment Between 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.

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

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.

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.