22 Thoughts for ALCO
- Vinny Clevenger
- May 22
- 9 min read
Updated: Jun 23
ALCO | ALM Strategy
On April 21st of 2003, I walked into the Browns Wharf building in Newburyport, Massachusetts for my first day on the job at Darling Consulting Group. While some colleagues might joke this was also the last time I arrived early to the office, little did I know at that time that I wasn’t starting a job, I was embarking on a journey that would shape my professional and personal life. In the 22 years that have since passed, I’ve had the great fortune of working for a terrific company that is loaded with passionate people dedicated to the success of our clients.
Sentimentality aside, I have observed a number of common themes regarding asset / liability management and the business of banking that still ring true (to me). So, in the spirit of my 22nd work “anniversary,” here are 22 observations (in no particular order):
The best definition of liquidity is as follows: The ability to raise cash quickly, at a reasonable cost, without incurring a principal loss. I recently re-discovered a book authored by George Darling titled “The Business of Banking for Bank Directors” which promoted this very definition. For a document that was published back in 1995, its principles still apply to everyday balance sheet management. This 3-pronged definition has served financial institutions very well over a long period of time.
The goal of Interest Rate Risk Management is not to predict interest rates. The objective of IRR should be to triangulate your business’ inherent exposure. While most characterize themselves as “asset- or liability-” sensitive, what happens if rates only go up / down a little, or a lot? What occurs if the shape of the yield curve changes? How does the optionality within your business change? What happens if the mix of the balance sheet changes? IRR Management is not about taking bets on rates and thinking that only one scenario causes risk or reward.
Time can heal a lot of wounds. Going back to the credit-related issues of the 2009 era, the institutions that weathered those scenarios best simply needed time. The same might be applied to the more recent issues surrounding unrealized losses in the bond portfolios resident on most balance sheets. Ultimately, can your institution tread water for a prolonged period of time during an adverse operating environment? Only appropriate stress testing can yield that answer.
Capital is King. Earlier in my career, I was tasked with building comprehensive capital policies and plans. These plans were generally required by examiners in the wake of profound credit deterioration at financial institutions. It was at that point that I realized that Interest Rate Risk isn’t generally what craters an institution. It was much less complicated. It was the fact that if you lent money to someone who couldn’t pay you back, you were going to have issues. A novel concept indeed! Given this, the impact on capital should be the first consideration when evaluating all balance sheet transactions.
You’d better be able to tell your story. The best-prepared management teams can succinctly and coherently articulate their strategy and approach to their examiners. Those who do generally navigate their exam cycles with relative ease. However, if a regulator smells something is “off” or if there isn’t a full comprehension of a calculation/ratio/etc., be ready for them to take a deeper look under the hood.
“We are in the business of taking risk.” At some point, an institution must decide where it is prudent to take risk within their business lines. No institution will remain solvent over the long term by hoarding liquidity, matching their balance sheet transactions, or eschewing growth. If you run your institution to make a regulator happy, the clock is ticking on your institution’s existence.
Don’t “check the box.” Oftentimes, when we start a new engagement, I’m surprised by how the ALCO meeting was traditionally handled. It was typically viewed as a necessary “evil” or “check the box” (for the examiners) exercise filled with ratio analysis and backward-looking discussion. Given that the spread between the yield on assets and the cost of your liabilities represents 90% of your bottom-line income, why would anyone overlook the ALCO process?
“Focus on just one takeaway.” During DCG's annual Balance Sheet & Model Risk Management Conference in Boston, our founder George Darling would always conclude his opening remarks with the stated goal for attendees to find “one key takeaway” to bring back to their institution. In many ways, this should be applied to every ALCO meeting. It’s better to do one thing well than a lot of things poorly. While a simple concept, the overwhelming nature of ratios / data / etc. tend to overshadow what is important for your organization.
If you didn’t document it, it didn’t happen. I have found that many institutions incite regulatory scrutiny for the lack of documentation. In many cases, the ALCO has addressed a particular issue but hasn’t adequately memorialized it. So, whatever your group is focusing on, foster a culture of documenting it.
“Go to the extremes.” This is a common refrain of DCG President & CEO Matt Pieniazek. It should be a prerequisite when evaluating any potential strategy. It’s critical to understand what could possibly go wrong. When contemplating some esoteric transaction, you should ask, “What’s the worst-case scenario?” and determine whether you can live with the consequences. Ultimately, the team should vet the wide range of outcomes before implementing a new strategy.
It’s easier to be a bad banker in a good market than a good banker in a bad market. One observation that I’ve had over the years is that some of the best-performing banks are in the very best markets. While it's possible to be profitable and successful in a mature market with less robust growth, the reality is that most of the annual “awards” for bankers go to the leaders of institutions domiciled in high growth markets. If you can pair a good banker with a good market, the possibilities are endless.
If you “timed” the market, you probably just got lucky. There is a terrific chart that reconciles the market's outlook for interest rates versus what ultimately occurred (commonly referred to as the “Hairy Chart”). For those uninitiated, I can summarize it by remarking the markets are not very good at predicting interest rates. Therefore, if your team is awaiting the “perfect” time to execute, it might never arrive, so instead set clear parameters for when execution is appropriate.
Source: Chatham Financial
There is limited value in managing to “Economic Value” (EVE / NEV). Going back to my early years at DCG, our firm ran a very small number of Economic Value calculations. However, in the wake of the “Great Recession,” regulatory expectations evolved and these calculations became required modeling as part of the risk management process. And shortly thereafter, assumptions and policy formulation mandates followed. But as was the case over 20 years ago, Economic Value should still be viewed as a secondary scoping tool. It is not ever reflective of “actual” value.
Stress Test, but don’t forget about the remediation plan. There is no doubt that the frequency and depth of stress testing have increased over the past two decades. It’s commonplace to see enterprise stress testing completed on all key areas of risk management. However, it seems that a favorite regulatory pastime is poking holes in the assumptions underlying these stress tests. While there are endless possibilities regarding potential stress, it’s also similarly important to memorialize the institutions’ pre-ordained response to these actions. In many cases, this “heads off” additional requests to alter existing stress tests.
Don’t get caught in the “Precisely Incorrect” trap. Most of us are familiar with the phrase “paralysis by analysis,” but it can become a reality given the thousands of assumptions that underpin ALCO models. After all, these are models, not exact predictions of the future. Rigorous testing of the assumptions is critical, but ALCO should never be viewed through the lens of an accounting exercise.
“Without data, you’re just another person with an opinion.” This quote from engineer W. Edwards Deming should be shared with all members of ALCO. There is no point in making a decision that is not informed by data. While hunches, “one off” anecdotes, and personal biases might ultimately be proven correct, they are just guesses without having the data intelligence.
Get the right people in the room. A subtle but often overlooked facet of ALM is committee membership. Some ALCOs comprise 30 plus members representing various positions within the organization. Others limit the meeting to senior leadership. There is no “one size fits all” but the best committees effectively challenge one another and walk away from ALCO with actionable strategy. Be sure to have a structure in place that supports that goal.
You are not that good at gathering deposits when rates fall, nor as bad as you might think when rates increase. With the good fortune of working at DCG through a few wide swings in interest rates, I’ve observed the ebb and flow of deposits that typically occur as rates move up and down. It’s no secret that deposits are more transient in rising rate scenarios than falling. Given this, ALCOs must define their definition of successful deposit growth / retention in those two disparate environments. We can’t behave the same way in both of those scenarios and expect the same results.
Net Overhead / Assets is my favorite Uniform Bank Performance Ratio (UBPR). While so much of what we focus on during ALCO is directed at “above the line” items, the expense structure of a bank can dictate the necessary returns for profitability. For example, if a bank books a transaction at a spread below the Net Overhead ratio, then in effect, they are allocating capital towards a transaction that is not (currently) accretive. This can be helpful for your lending team in understanding that while your spreads might be wider than others, it’s not “apples to apples” if those competitors operate in a leaner fashion.
Understand all the tools at your disposal. If you were in a battle and there was a weapon that could potentially help you win, would you understand how to use it, or just let it collect dust and deal with the outcome? Derivatives, when used properly, can help insulate a balance sheet versus inherent risks. At a minimum, ALCOs should maintain an approved policy and be fully educated on the different transactions that might assist in managing risk.
“Things that have never happened before happen all the time.” This quote from Stanford professor Scott Sagan expresses the idea that unprecedented events seem to always occur. Here are a few from the past 22 years: IndyMac, Bear Sterns, Lehman, WAMU, The Great Recession, Sub Prime mortgage crisis, Zero Interest Rate Policy, COVID, Government Shutdowns, Silicon Valley Bank, 9% inflation, Yield Curve Inversion, etc. While we try to plan for every contingency, the reality is that whatever might be “coming” next is never obvious.
Don’t overlook the power of a strong Culture within your organization. To me, culture is not a placard placed above the microwave in the office kitchen. It is not “Thirsty Thursday.” Rather, culture is a genuine interest in your colleagues no matter their experience or position title. And one thing is for sure, when you walk into certain institutions, you can certainly “feel” it. While we spend endless hours in spreadsheets and models, don’t forget about the collective energy of a team on the same page.
And one more “bonus” observation as I embark on year twenty-three. The best institutions have the best people. The people are ultimately what drive the success of the organization. DCG CEO Matt Pieniazek always remarks that our “assets” drive home to their families every night. While the banking industry continues to evolve and change, good people are still good people, and they will adapt accordingly. Find, nurture, and retain your best people and success is much more likely.
I’m so very thankful for my experience here at DCG and look forward to many great years ahead. It’s easy to stay at one company for a long time when you don’t feel like you have “colleagues.” Instead, we have “family” members whom we share an office with.
For more insights from Darling Consulting Group, click here.
Vinny Clevenger is a Managing Director at Darling Consulting Group. In this position, he advises financial institutions on balance sheet management strategies. He takes a practical approach to the demands that the economic and regulatory environments place on his clients. Since joining the firm in 2003, he has worked in a number of capacities within DCG assisting clients in all aspects of ALM, including process reviews, model validations, policy reviews, capital management, and contingency liquidity planning.
Vinny is the editor of the monthly DCG Bulletin and co-host of DCG’s On the Balance Sheet® podcast.
Prior to DCG, Vinny worked in public accounting. He holds a B.S. in accounting from Merrimack College in North Andover, MA, where he served as captain of the Men’s Division 1 Ice Hockey Team.
© 2025 Darling Consulting Group, Inc.
Comments