The ongoing raft of bank failures and an evolving regulatory landscape have renewed the focus on balance sheet, interest rate, and liquidity risk management. In a recent series of webinars, experts from Moody’s Analytics covered a wide range of topics including investment portfolio risk, liability and deposit side risk, how to employ a 5-step balance sheet playbook to navigate the current market dislocation with greater efficiency and confidence, and best practices in developing an effective ALCO. In this article we summarize “Re-examining Your Balance Sheet Position.”
The next webinar examined the liability side of the balance sheet, by diving into the details of managing interest rate risk in a volatile environment. Moody’s experts focused on how banks and credit unions could successfully leverage different approaches to identify, manage, and mitigate balance sheet interest rate risk exposure.
Although much has been made of how the recent increase in deposit outflows has been spurred by a drastic rise in interest rates, the reality is that a shift in the deposit picture among US banking institutions has been occurring for more than a decade.
Today, banks under $100 billion in assets hold just a one-third deposit share, compared with roughly 60 percent in 2010. Large banks have deployed inexpensive, excess deposits to increase scale and prioritize earnings growth since 2020. Depositors today have a wider range of alternatives for their funds, and more convenient access than ever before. Moreover, the recent bank failures, along with ongoing stock market volatility may be driving further headwinds in depositor confidence.
To deal with these challenges, banks must “know their balance sheet.” To do this effectively, they must have access to multiple tools for analysis. One of these tools is the “earnings-at-risk” methodology, which provides a path-dependent focus on potential earnings over time across a range of potential scenarios. Another is the “economic value of equity (EVE)” approach, which is a point in time view of interest rate risk that provides an “economic” value for the institution’s holdings across various interest rate environments and assumptions. Asset liability managers can stress those assumptions to uncover hidden risks.
This multi-factor approach to evaluating asset portfolio risk is nothing new. In fact, Interagency Supervisory Guidance on Stress Testing from 2012 called for banks and credit unions to utilize “an effective stress testing framework [that] employs multiple conceptually sound stress testing activities and approaches.”
The key is to recognize that the world has changed. Bankers need to take a critical look at their historical assumptions, and according to Jerry Clark, Director, Sales Manager at Moody’s Analytics, “torture the model, until it confesses its risk.”
To do this, asset and liability managers can leverage an award-winning ALM solution like Moody’s Analytics ALM US, which delivers key systems and services that institutions use to model and manage risk, and make fundamental business decisions related to ALM, portfolio management, liquidity, solvency, and budgeting.
Click here to watch the webinar replay.
For more information on how Moody's is helping financial institutions with balance sheet management, please visit our ALM page to learn more about the offering.
