32 JULY / AUGUST 2023 Seventeenth-century Europe was a period of political and social upheaval led by several powerful countries, including France, England, Spain and the Dutch Republic. Sébastien Le Prestre de Vauban, better known as simply Vauban, was a French military engineer considered one of the most important figures in the history of fortifications. Vauban’s designs were so effective that they helped make France the most powerful nation in Europe for over a century. One of the key principles of Vauban’s fortifications was the concept of balance. He believed a strong fortress must have a balance of different types of defenses, each with its own strengths and weaknesses. For example, a fortress should have a strong outer wall to protect it from attack, but also have a moat, cannons and other defenses to provide additional protection. By having a balance of different types of defenses, a fortress could be more difficult to attack and more likely to withstand an attack. The principles of balance that Vauban outlined centuries ago are also applicable to bank balance sheet management today. A strong bank must have a balance View of Neuf-Brisach, a unique fortified octagonal town built in 1698. The Fortress Balance Sheet and Community Banking DIRECTORS / SENIOR MANAGEMENT of different types of assets, each with its own risks and returns profiles. For example, a bank should not have all its assets invested in loans. It should also have investments in cash, government securities such as mortgaged backed securities, municipal bonds and other earning assets. It should properly monitor the duration of the balance sheet and potential changes in asset fair values. By having a diverse balance sheet, a bank can reduce its overall risk and increase its chances of success in weathering a recession or economic downturn. Balance is also important for banks when it comes to managing interest rate risk. Regardless of whether the financial institution is asset-sensitive or liability-sensitive, it is prudent to have stable earnings across various rate environments within approved risk limits. In addition to balance, Vauban emphasized the importance of preparation in his defensive tactics. He argued that a strong fortress must be well-built and well-supplied. The walls must be strong, the cannons must be in good condition and the soldiers must be well-trained and well-equipped. By being prepared, a fortress could withstand an attack and continue to function even in the event of a siege. The preparation and planning that Vauban implemented are also relevant to bank management as we think about the asset liability committee. Banks are Matt Harris Associate Partner The Baker Group MHarris@GoBaker.com The Baker Group is a Preferred Service Provider of the Indiana Bankers Association and an IBA Diamond Associate Member. Vauban
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