Making the Choice to Hunker Down or Grow: Guest Opinion
It's a new year and amid all of the uncertainty that will shape economic and business conditions for 2014, including the timing and magnitude of a potential rise in interest rates, credit unions can still attain peak performance. To do so, they need to resolve to get back to basics and re-evaluate or at least validate their business strategy. Credit unions need to be able to evaluate their options, perhaps quite frequently. They also need to constantly monitor and analyze their performance if they expect to successfully execute their business plan.
The credit unions that will be successful in the face of uncertain conditions are those that plan for their impact, to the extent that they can, monitor the results of their plans, and act based on an analysis of their ongoing performance. Asset-liability management can help, by providing credit unions with a real understanding of what is taking place on their balance sheets. ALM also helps to ensure that credit unions are proactively managing their balance sheets in the context of their business strategy.
Asset-liability management involves the management of risk that derives from changing interest-rate levels and the impact they can have on earnings stream and value such as market risk, inclusive of interest rate risk. ALM also involves managing the risk that insufficient cash will be generated from either assets or liabilities to meet membership needs or to exploit unanticipated business opportunities or liquidity risk. In addition, ALM can involve managing the risk and impact of loans and investments not being repaid such as credit risk.
Credit unions should consider that their business strategy and its execution significantly influence the potential impact of these risks. For this reason, ALM needs to be considered in a broader context. That context is a discipline known as enterprise performance management. EPM frames the condition, risks and prospects of a credit union by linking the elements needed to plan, monitor and manage the execution of business strategy. On a micro level, EPM, and the orchestration of strategy, take the form of tactical activities such as setting goals and targets, forecasting and modeling, planning and budgeting, and monitoring, analyzing and reporting results. It's here that ALM informs and supports EPM.
Credit unions can also use ALM to help assess the financial viability of various business strategies, along with related risks. ALM should be employed as an integral part of business planning.
Don Shaurette is director of market intelligence for financial and risk management solutions at Fiserv. He can be reached at 678-475-5389 or firstname.lastname@example.org.