Asset/Liability Management by the Numbers: How Are Peers Approaching ALM models?

Asset/liability management

Many financial institutions view asset/liability management (ALM) strictly as a regulatory requirement. From a functional standpoint, ALM helps credit unions make decisions on what loan, investment and borrowings the financial institution should pursue, as well as the rates to offer, in order to make profitable loans while mitigating risks. Financial institutions that run ALM models specifically to comply with regulation will often look at risks like credit risk, interest rate risk and some liquidity testing. But are we actively managing risk, or are we measuring and attempting to mitigate potential risks without necessarily thinking about profitability and opportunity today? Dave Koch, managing director of advisory services for Abrigo, asked this question during a recent webinar.

The ALM process can be so much more than simply “checking the box” to meet regulatory requirements. Rather, with a dynamic ALM process, credit unions are able to inform sound decision-making in both strategy and risk. When done correctly, a dynamic ALM provides the right guidance on profit maximization versus risk. There is significant room for improvement in this area for most financial institutions. A recent poll asked 100 CEOs and CFOs if they use their ALM results and models to guide decision making, and approximately 70% indicated that they did not. During the webinar, “Running a Dynamic Asset/Liability Management Committee,” half (51%) of respondents answered that their financial institution used a static approach to their ALM model, and 38% responded that their FI did indeed use a dynamic approach.