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.

FOMC Meeting May 2018 Blog Post David Green Advisors

Rates Are Set to Rise at June FOMC Meeting

Fed Signals June Rate Rise

The Fed continues to signal that they will increase the Fed Funds rate at their June meeting which will be held on June 12th-13th.  While they continue to ponder how many more rates hikes will be required to keep inflation from rising too quickly, banks should be focusing on the increasing pressure this next hike will put on deposit rates.  With top prime money fund rates just shy of 2.00%, depositors cannot be expected to ignore any further spread widening relative to bank deposit rates.  Banks should not bet on the low deposit betas that have characterized the last couple of years; these low betas are not robust to further rate increases, especially at banks that have continued to add aggressively to their loan portfolios.

Thinking About Interest Rate Risk May 2018 Blog Post David Green Advisors

It’s Time To Be Thinking About Interest Rate Risk

Fed Statement Comments and Interpretation

The Fed didn’t raise rates on May the 2nd, but they did keep the markets prepared for a hike at the next meeting in June.  In addition, they noted that inflation had ticked up, albeit slightly.  Wage pressures are beginning to come through the data and business investment has strengthened.

No real surprises, but it will be interesting to see where inflation goes from here and how much restraint they exercise from this point forward.  With inflation benign for so long, it seems like they could easily be slow to respond.  No doubt, we can expect rate volatility all along the curve as the markets react to every new piece of data.