While some know the old saying as “can’t see the forest for the trees,” there are others who are certain it’s “can’t see the forest through the trees.” The fact that this is debated, with strong opinions on both sides, is strikingly ironic. The meaning of the expression, in either form, points to an individual who is so focused on the details, that they’re unable to fully see the state of affairs. As bankers and balance sheet managers, we are all acutely familiar with this reality. Too often, we have a hard time diagnosing the big picture for (or through) the trees of the day-to-day management of our businesses.
There are many processes, meetings, committees, and banking relationships which can bog down a financial institution to the detriment of long-term balance sheet management. For example, lenders might limit the next deal’s pricing guidance to the last few deals; personal bankers might allow the latest competitor advertisement to interfere with true relationship banking; executive teams sometimes miss opportunities to create long-term margin stability by focusing on general ledger “silos” on both sides of the balance sheet.
So where is it then that we can maintain perspective, focusing on the big picture, the view that really matters to our long-term earnings resiliency and economic value? ALCO.
Asset/Liability Management Committee
ALCO. Now we’re talking about a forest overgrown with trees—GAP, deposit betas, EVE, interest rate forecasts, the economy, an evolving balance sheet, rate shocks and their relevancy, peer analysis, loan spreads, FOMC, key assumptions, duration, deposit strategies, decay rates, backtests, liquidity stress tests, investment portfolio strategy, and consistent regulatory compliance.
Take a moment to read that list again—that’s quite a lot for just one committee to focus. It is no wonder that many community bankers find it difficult to consistently get their ALCO process to result in a confident strategy and execution, all with long-term decision making in view. It’s difficult to always see the big picture.
The New Landscape
The earnings landscape ahead appears to be much more difficult. Net interest margin for the industry stood at 3.28% in the final quarter of 2019, down from the cycle high of 3.48% (year-end 2018). According to the FDIC, this was broad-based, as margins declined for institutions in all peer groups. Regardless of institution size, our industry is asset-sensitive, and the significant economic volatility of 2020 has the potential to only further exacerbate the issue.
A Broader View
Our experience has been that we can help you take a step back, so you can move forward with confidence. As a full-service bank-advisory group that’s part of a major regional bank and financial services firm, BOK Financial Corporation, our team helps guide senior management through the entire ALCO process, to develop and execute strategies intended to augment your interest rate risk and enhance your long term earnings prospects. We take the conversations well beyond simple reporting of numbers and metrics, from a canned report. In short, our team helps you enhance your ALCO meetings, moving from a reporting-only and regulatory “check mark” version of ALCO, and towards an effective long-term value-add version of ALCO.
BOK Financial Institutions Group provides asset liability modeling and consulting, third-party reviews, decay rate studies, wholesale funding solutions, investment portfolio strategy, and ongoing solutions for the latest needs facing bankers today.
Our team can be reached at 833-331-0345, or learn more at www.bokfinancial.com/institutions.
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