Andrew Okolski is a Senior Financial Strategist at The Baker Group. He works directly with clients in a broad range of areas, including ALM, education, portfolio management, interest rate risk management, strategic planning, regulatory issues, and wholesale market strategies for financial institutions. Contact: 800-937-2257, andyo@GoBaker.com. on the deposit side of things. So, our ALCO decisions and ALM assumptions must be kept in line to ensure consistent accuracy of future strategic planning. This is why we must always be looking to define, measure, and manage our risks. Hopefully, many of you will already have this management process and find yourselves well prepared to handle this environment’s new challenges. For those who do not, there is still time to align your internal systems and improve your institution’s ability to react quickly and correctly. However, that window of opportunity is closing and now is the time to start having those conversations. *CPI Data & Chart from Bloomberg Headline CPI – YOY% Change 02/10/2017 – 05/31/2022 Well, at least part of the answer is that we need to quicken the pace of asset repricing on our balance sheets. By no means am I implying that this is an easy task. However, it is extremely necessary and should be top management and ALCOs priority. Increased loan demand is a very welcome sight, especially after what we have experienced over the past two years. The tricky part is that those new loans must be at or above current market levels to begin softening our EVE risk. It doesn’t help our IRR position to be adding loans at 2021 levels. The market currently expects Fed Funds to reach 2.50% to 3.00% by the end of this year, and short investments (without credit risk) can easily earn us a 3% yield or more. All these factors must be taken into account when discussing and adjusting asset pricing strategies right now. This is one of the reasons that including ALM results in every strategic decision is so critical. It greatly shortens our reaction time and reduces how far off the path we can find ourselves in volatile environments. 2022, and likely 2023, will require more frequent/active ALCO and strategic planning sessions. At the same time, we need to ensure that our decisions in those meetings align with the assumptions we use in our ALM documents. Otherwise, we are basing our strategic movements on outdated directions. For example, what if our ALM assumes that new loan volume will keep up with market rates (in a rising rate environment) to increase yield and limit EVE risk? However, during our next ALCO/board meeting, the temptation to continue generating additional loan volume by not raising loan rates is too strong for the board to pass up. We could end up with a significantly higher level of IRR than our ALM results originally showed. The same can certainly be said The faster interest rates rise, the greater the negative impact on our EVE in particular. NEBRASKA BANKERS ASSOCIATION 23
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