FTP ALM Webinar: Nashville, TN May 2022

Integrating Funds Transfer Pricing with Asset Liability Management:  Ensuring the Alignment Between Risk and Profitability Management


In this 2-day workshop  (live and webcast), we review lessons learned from the last several business cycles, including what banks missed and why they missed it – we will been keenly focused on the 2004-6 rate cycle, which was the last time in the US that we experience a material increase in interest rates.  Drawing on these lessons, I describe how risk and profitability management are one in the same problem; they cannot be treated as separate and distinct, else the result will be conflicting stories of how the financial institution (FI) makes money.

Following a brief discussion on the sources of interest rate risk (IRR) and liquidity risk (LR), I show how a well-functioning funds transfer pricing (FTP) process immunizes lenders and deposit gatherers against these risks.  This is a key motivation for lenders and deposit gatherers to embrace FTP.  Without it, they are exposed to risks over which they have no control.

I provide a detailed description of the mismatch center and explain how it should contain all IRR- and LR-related earnings and earnings volatility.  In a well-functioning FTP framework, the earnings risk profile of the FI and the earnings risk profile of the mismatch center should be identical regardless of the risk profile of the FI.

The feedback from the FTP Conference participants was nothing short of excellent. Several product managers have reported that the workshop has positively influenced their decisions around which deposit products to promote and how they will price and manage them to maximize their value to their business units AND to the bank.  – Director, Funds Transfer Pricing, Royal Bank of Canada

Given that non-maturity deposits (NMDs) make up a material source of funding at most FIs, I describe a method of calculating the FTP rates on NMDs that follows logically from their IRR and LR cashflow attributes.  This approach compels deposit gatherers to consider how product behaviors (over which they have some control) drive the crediting rate they receive, i.e. the FTP rate is not arbitrarily imposed on them.  This understanding produces significantly more accurate measures of IRR and LR for the FI.  This discussion is particularly germane given the excess deposits that currently plague the system – how sticky are they and how rate sensitive are they?  Past behaviors may not be entirely helpful, so having a behavioral model that provides real time feedback is essential to detecting behavioral changes which may have material implications for risk and profitability.

FTP ALM Workshop Nashville May 2022 DGA

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 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.

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.