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.

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.

FMS Annual 2018 Conference Tempe David Green Advisors

FMS/AMIfs Annual Conference – Workshop and Presentation Summaries

I spent much of last week in Tempe, Arizona at the FMS/AMIfs Annual Conference. This is an event I have attended for the past several years to explore and present on topics in financial performance and risk management. This year, I exhibited at the event, conducted a 1/2-day pre-conference workshop and delivered a general session with one of my clients.

The pre-conference workshop, which was held on Wednesday morning, was entitled “How Funds Transfer Pricing is Essential to Meaningful Risk and Profitability Analysis.”  It described how FTP is necessary for a robust analysis and decomposition of earnings at any depository institution, regardless of size or charter type.  I explained how FTP should be used to quantify the amount of depository earnings that arise from IRR and LR exposures; without a properly-constructed FTP process, earnings that should be otherwise be attributed to these risks are incorrectly attributed to other business activities such as lending and deposit gathering.  I also explained that a key benefit of a well-functioning FTP process is that the lending and deposit gathering business units are immunized against IRR and LR.  This latter point is extremely important as a well-functioning FTP process requires that the business segments overcome the intransigent view that FTP is an arbitrary tax on their earnings.

Now that interest rates have increased and are expected to continue increasing, institutions that do not have a well-functioning FTP process are likely to find that earnings attributed to their lending and deposit gathering business units are getting squeezed; this is happening because the business units have not been effectively immunized against IRR and LR.  Additionally, because of the improper attribution of earnings, management attempts to get back to budgeted/forecast earnings levels will almost certainly fail or lead to a sub-optimal increase in risk taking; in fact, any decisions or downstream business processes that rely upon accurate measures of business segment or product profitability will be adversely impacted.  These include, but are not limited to, capital allocation, compensation and incentive schema as well as strategic balance sheet management decisions.

The general session on Friday morning, which was delivered with Brian Gilbert, ALM/FTP Manager at Pinnacle Financial Partners in Nashville, Tennessee, was entitled “Developing and Implementing a Comprehensive Model of NMD Behaviors.”  I have worked with Brian for much of the last year implementing a NMD model which is unique in the industry in that it contains a fully-integrated FTP engine.  It was specifically designed to solve one of the biggest challenges associated with NMD modeling – aligning the treatment of re-pricing and liquidity cash flows across all risk and profitability applications.  Virtually all third-party studies and stand-alone models, whether developed externally or in-house, are silent on FTP.  This means that the attribution of value through FTP and other compensation schema is an afterthought and will not be consistent with the treatment of NMDs in IRR and LR models.  At institutions where this problem exists, the process for ascribing value to deposits conflicts with their treatment in risk models; two different treatments cannot both be correct – either the profit math or the risk math is incorrect, or both are incorrect.  No doubt, evidence of this dichotomy will become increasingly evident as depositories come under increasing pressure to raise deposit rates faster than anticipated.

It was great seeing everyone at the conference.  If you missed it, make an effort to attend next year.  See you then.