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    TMS or ALM? Or both?

    May 2022

    TMS or ALM? Or both?

    How to find the optimum solution for your financial institution – move beyond time-consuming management by spreadsheets

    If you are working for a small or medium-sized financial institution, such as a regional or private bank, a building society or credit union, and you are seeing rapid or steady growth, you will eventually hit a point where manual methods, spreadsheets or outdated software are holding your Treasury and/or Asset Liability Management (ALM) functions back.

    Or you might already have passed that point!

    As a financial institution grows, the financial data it must manage grows in both volume and complexity. Spreadsheets and the manual processes that accompany them inevitably increase operational risk (e.g., key person risk), and become too inefficient and rudimentary to manage expanding tasks, especially when you reach thresholds that impose new regulatory reporting and systems requirements.
    Growth also puts strains on your staff. In a small financial institution, the same person or team might be responsible for treasury and ALM and trying to untangle the two may be difficult. But when the workload and complexities reach a critical mass, a decision has to be taken to invest in the right software to automate routine tasks, reduce operational risk and allow effective monitoring and management of risks (market risk, interest rate risk and liquidity risk). At which point you may be asking yourself, “Do I need to invest in a treasury management system (TMS) or an asset liability management (ALM) system?”


    As is well known, the core function of treasury is ensuring sufficient and appropriate funding for an organisation. By definition, this involves monitoring liquidity, counterparty and interest rate risks. A financial institution’s balance sheet must bear enormous market risk as well as credit risk, but operationally the financial institution’s business is essentially confined to accepting deposits and extending credit to borrowers.
    The treasury function determines the funds transfer prices (FTP) on the basis of market rates of interest, the cost of hedging market risk and the cost of maintaining reserve assets of the financial intuition. Hence market risk is identified and monitored through treasury. Notably, the treasury function monitors and manages interest rate and exchange rate movements in the markets, and hence it is much easier to administer such risks through treasury operations. Treasury uses short-term cash, term deposits, bonds, derivatives and other instruments to bridge the liquidity and interest rate sensitivity gaps.
    From the outside, treasury is viewed as a front office function, dealing with deposits from customers and other financial institutions. In reality its responsibilities cross risk policy compliance, investment, funding and hedging deal execution, regulatory reporting, settlements, accounting and asset and liability management.

    Asset Liability Management (ALM)

    Asset liability management can be broadly defined as the coordinated management of a financial institution’s balance sheet to allow for alternative interest rate, liquidity and foreign exchange scenarios. ALM is a methodology that allows the financial institution to test inter-relationships between a wide variety of risk factors including market risks, liquidity risk, management decisions, customer behaviour, uncertain product cycles and so on.
    Typically, a financial institution that reaches a critical mass may set up a dedicated ALM team if the balance sheet composition has led to the need for an asset buffer of a certain size (to act as insurance for liquidity purposes) or to some mismatch that requires managing (be it term, rate, currency, behavioural etc). The ALM team plays a critical role where there is a need to match the assets and liabilities and minimize liquidity as well as market risk.

    Choosing the optimum software solution

    As should be clear, there is quite some overlap between the treasury and ALM functions and the job titles overlap too: Treasurer, Head of ALM, Head of Money Markets etc. So, if you have decided it is time to invest in your first software to deal with these processes, or that it is time to upgrade from what you are currently using, which way should you go? An ALM solution, or a treasury management system (TMS)?
    It is probably best to examine where the balance sheet risk is greatest.

    If the main source of risk is booking in front-office trades and then clearing them in the back-office accounting and managing the asset buffers (bonds, derivatives for managing interest rate and FX risk etc.) to be able to liquidate them in the event of a stress, then a financial institution is more likely to incline towards a TMS. (Of course, this is a gross simplification as treasury does far more than booking trades, but this is its focus).
    In traditional banking terms, ALM sits more in the middle office, managing longer term risks. On top of the daily trades coming in from the treasury department, there are mortgages, personal and corporate loans, credit cards, etc. If this is where the main risks are occurring, and therefore probably also absorbing most time and resources, then a financial institution will be more inclined towards ALM.

    Another difference is the time horizon. Dealing with day-to-day trades, treasury needs to be fully on top of things with up-to-the-minute calculations of the market value of the various financial instruments. By contrast, the positions on mortgages, personal and corporate loans, etc. tend to be updated at the end of the day and regulatory reporting is typically monthly.

    Four suggested guidelines are:

    1. A small-to-medium-sized financial institution with a very vanilla trading book (e.g., focused on short-term cash and/or government bonds and with very little hedging and no derivatives) can probably just about hang on managing with spreadsheets. Alternatively, it could consider outsourcing to a managed services provider, until the balance sheet critical mass becomes sufficient to move the activities in-house.

    2. A financial institution with an active trading book, risk exposure above sovereign risk, and which is struggling to stay on top of mark-to-market and other calculations, but has less focus on asset-backed or unsecured loans such as mortgages or credit cards, should be looking at a TMS.

    3. A financial institution with a considerable amount of corporate or retail lending activity, should consider a comprehensive asset and liability management solution, encompassing interest rate risk management, liquidity risk management, funds transfer pricing (FTP), multi-factor behaviour modelling, and balance sheet management capabilities. Under this heading come small banks, building societies and credit unions.

    4. A financial institution that has experienced rapid growth and has a wide spread of activity may need both ALM and TMS. It will be of advantage for such an institution to consider a combined ALM & TMS offering, which will deliver a number of benefits to any financial institution, not least: streamlined data, consolidated reporting and simpler vendor management.

    It should be remembered that, every financial institution is unique and a thorough analysis of the balance of workloads through front, middle and back offices is advisable before making any decision on a technology roadmap.

    SaaS technology provides effective solutions
    Despite all the complexities, finding the right answer to this conundrum is considerably easier now than in the past, when smaller financial institutions could, on the one hand, not afford to build and maintain their own custom software, but on the other hand did not want to be hemmed in by an ill-fitting off-the-shelf package. Today, with software-as-a-service (SaaS), it is easier to test out available solutions without applying a lot of internal resources for the long term or boxing yourself in. Upgrades and maintenance, for example when new regulations or reporting requirements come in, are pushed through without impacting your operations. As SaaS has pushed out the boundaries of risk management technology, now is the time to consider your options.

    Against this background, Moody’s Analytics, which offers market leading ALM software, has entered into a partnership with GTreasury, a leading TMS provider, to help financial institutions identify the most suitable approach to fixing these issues.

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