DCG Annual Conference Wrap-Up
We are fresh from a stellar three days together with nearly 300 colleagues representing over 180 banks, credit unions, regulators, and industry partners at DCG’s 39th Annual Balance Sheet & Model Risk Management conference. This year’s event marked the first time in four years that the conference has returned to its traditional home in Boston.
And while it sounds cliché to say a return to the “in person” version of the conference was a marked improvement over its virtual counterpart, the energy in the building was palpable. Maybe it was catching up with old friends, meeting new ones, or simply that the conference took place during such a critical time of uncertainty in this operating environment, but something just felt “different” than in prior years.
During CEO Matt Pienaziek’s opening remarks, he reiterated George Darling’s intent for all attendees to come away with “one good idea” they can take back to their institution and benefit from. For those who were unable to attend, we hope to see you in 2024 – but in the meantime, here are some “good idea” highlights.
Economist Chris Low
Chris Low, Chief Economist of FHN Financial, opened the festivities on Tuesday morning with his outlook for the US economy and the Federal Reserve. Chris shared his belief that the FOMC will continue its tightening cycle and move rates at two future meetings to reach a Fed Funds level of 5.75%. However, he believed the FOMC would likely “skip” increasing rates at the June meeting (he was proven correct). Chris mentioned that the June meeting was essentially the first time the FOMC actually had to make a decision in a long time.
Chris remarked that the FOMC will likely overtighten, as “is always the case,” because monetary policy isn’t exactly a precise tool.
Chris was also kind enough to join DCG’s podcast “On the Balance Sheet,” which is appointment listening for those interested in some of his commentary and a deeper dive into some of the concepts outlined above.
Almost regardless of the session, a constant theme this year was liquidity. There were sessions ranging from the core education session on measuring and managing liquidity (focused primarily on the establishment of a ‘definition’ of liquidity), to a session on advanced predictive analytics to support liquidity and deposit strategies, and everything in between.
Emerging best practices in stress testing, assumption support, and back-testing given the perfect storm of events (rapid rise in rate, deposit outflow, bank failures, regulatory expectations, etc.) financial institutions are currently navigating.
Investment opportunities (and pitfalls) dependent upon overall liquidity, interest rate risk, and earnings strategies. Most institutions are dealing with unrealized losses that might be “clouding judgment” on future purchases. There are no “one size fits all” strategies. Understanding the risk/return of any transaction and its impact on liquidity, interest rate risk, and earnings today and going forward is paramount.
The impact of current liquidity levels on lending was an overarching theme in these sessions as well as the peer group discussions. Some variation of the following was made countless times: “We need to have much higher rates on loan originations!”
Banking as a service highlighted potential options/partners to gather new relationships in the quickly changing space. Ask yourself if your current strategies are working. If not, what might work?
Regulatory hot button strategies touched on many operating and contingency liquidity ideas to improve /protect liquidity levels. Unfunded commitments (LOCs and construction deals) were discussed as potential blind spots in liquidity processes.
How might a credit downturn impact your liquidity? The time to understand the impacts is before there is a problem.
Commercial Real Estate
Not surprising that commercial real estate (concentrations, credit, concerns, maturity volumes, etc.) was a focus of several sessions. While current distress levels are low, it’s important to understand how exposure to different sectors (office, industrial, multifamily, retail, hospitality) and how changing economic conditions, the impact of ESG (environmental, social, and governance), and substantial investor capital waiting on the sidelines will impact these sectors going forward.
Credit Union Track
In the Credit Union peer groups, several NCUA capital market specialists in attendance shared their views on the marginal costs of funding and the role of derivatives with balance sheet managers. All in attendance greatly appreciated the open dialogue and direction.
Model Risk Management
A number of sessions focused on the critically important area of Model Risk Management. Make no mistake, with all the recent “developments” in the industry, maintaining a model that has well-documented assumptions, has been rigorously validated, and has been effectively challenged will lead to more confident decision making. Furthermore, now that CECL is a reality for most, it’s clear that not all adoption practices are equal, and therefore some models have fallen short of expectations. But as DFAST taught us, best practices will emerge, and the highest performers will build a culture and competency around their models.
Nearly as universal as the liquidity theme was the discussion on how critical it is to have the ability to use derivatives. When viewed properly, derivatives are insurance policies to reduce risk on balance sheets. The time to buy insurance is well before you need it.
During the conference’s signature lobster bake dinner, I had the opportunity to sit with a senior member of a firm that specializes in assisting institutions with derivative transactions. I specifically asked him what he thought the largest impediment to securing a relationship with a prospective client was. He mentioned that so many times managers simply believe “they missed it” and rates had moved in the wrong direction for the transaction they were considering. He stressed the importance of recognizing that future opportunities will present themselves, and to get your institution prepared (educated / policies / etc.) for those occasions.
Derivatives are a tool that should be in your toolbox. There are risks. Education and policies are critical steps to be able to effectively use these tools. If your toolbox is missing this tool, ask yourself why and consider adding it today.
Peer Group Sessions
Some of the conference’s most highly rated sessions are always the Peer Groups, which are designed to allow a free-flowing exchange of ideas among similarly-sized institutions. I was lucky enough to help facilitate discussion with Banks ranging from $1.5B to $2B. We asked participants to share something they thought their bank was “good” at and something they wished to improve upon. Without question, most banks wanted to discuss something related to their liquidity position or profile. Several institutions were happy with their lending functions and their ability to attract core customer relationships via “best in class” customer service.
One of the more interesting exchanges occurred when the topic of the Bank Term Funding Program was introduced. We asked how many of the institutions were drawing funding from that program and most of the respondents indicated they had already locked in funding. In fact, some acknowledged they secured the funding on the day it reached its trough of 4.39%. The small minority of those who hadn’t yet partaken were quick to ask how these balance sheet managers felt about the “reputational” risk associated with the program. It was great to see bankers debating the pros / cons of that funding. And my guess is that in that specific moment, a few bankers had their “one key takeaway” from the conference.
Looking Ahead to the Big Four-Oh
We’d like to thank all who attended the 39th annual conference in Boston. For those unable to join us, we hope this “CliffsNotes®” version of the event is helpful to your institution, and you might be able to find “one key takeaway” to put into action!
We are looking forward to welcoming everyone back to Boston in 2024 for the conference’s 40th (!!!) anniversary, and already have great plans in motion for our best year yet. Be sure to mark your calendars for June 10-11, and we will keep you updated on the registration details.
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ABOUT THE AUTHORS
Keith Reagan is an Executive Managing Director at Darling Consulting Group. His passion for educating and mentoring serves him well in his multiple roles. As one of the firm’s advisory consultants, Keith works with financial institutions of all sizes to improve their overall performance by providing proactive strategic advice. With nearly 30 years of experience, he has been a frequent industry speaker and author and served on the faculty of multiple banking schools. As the advisory consultants’ team manager and member of the senior management team, Keith strives to continuously learn and mentor those around him.
Keith received a B.S. in business administration and Finance from the University of New Hampshire. Keith has combined his passion for education and mentoring with his love of family and sports by coaching multiple sports for the last 15 years in southern New Hampshire, where he lives with his wife and two young adult children.
Vinny Clevenger is a Managing Director at DCG. 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 serves as the editor for the DCG monthly Bulletin as well as 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 a captain of the Men’s Division 1 Ice Hockey Team.
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