The Dreaded ALCO Meeting: 5 Big Ideas Part II

ALCO | ALM Strategy 

Let’s face it: the biggest challenge with dreadful ALCO meetings isn’t a lack of data. It’s deciding what matters.

Every meeting can bring hundreds of pages of analysis (Who could ever review all those scenarios in one meeting? I’d really like to know.) and maybe not enough of asking the hard questions. But the truth is that without clear direction, strategy discussions can’t help but fall flat.

In Part 1 of this series, I emphasized the importance of telling a concise story to promote healthy dialogue. Now, let’s build on that foundation with two more Big Ideas to bring sharper focus to your next discussion.

If you missed the first installment, I invite you to check out Big Idea #1: Focus on the Story. Successfully telling a story at ALCO can go a long way toward bridging the gap between a standard review and a forward-thinking strategy development session. I recommend three steps to be a better storyteller at ALCO, starting with getting clear on what matters most.

Big Idea #2: What Are the Three Things?

The late great George Darling would often say, “There should typically be three key issues to cover at any ALCO meeting.” If you knew George, that was one of the things that made him great: Making the complex simple.

Here’s an example of a recent ALCO meeting and their Three Things:

1. Testing CD resiliency

2. Discipline with layered funding

3. Separating personal bias from balance sheet bias

The point is that many topics will be covered at ALCO. However, if we can always come back to the three most important issues, then we have our basis for strategy discussion.

Ask yourself, what are those discussion points you need to have with ALCO at your next meeting?

Big Idea #3: Separate Personal Bias from Balance Sheet Bias

In a conference presentation earlier this year, my colleague and I polled an audience of 100 bankers on their opinion of what economic outcome is most likely to play out in 2025: Higher for Longer, Soft Landing, Hard Landing, or Re-Inflation. Nearly everyone in the room voted for a “Higher for Longer” rate environment with limited to no Fed cuts for 2025.

We then asked a follow-up question: Which scenario is the worst case for their institution’s earnings outlook? Half the audience voted for hard landing and the other half for re-inflation.

Here’s the point: focus on what you can control. Economic volatility feels like it’s at an all-time high, and yet, we have no control over what happens with market rates. In fact, it would be highly probable that the results of the first question would be different if asked today.

You do have control, however, over the balance sheet decisions you make today. Each balance sheet has its own embedded bias. Strive to take an independent look at the risk in the balance sheet while staying agnostic about the most recent market outlook.

Having liability sensitive IRR posture (margin exposure if rates go up) is a fitting example for today. Rates have lowered and the yield curve is less inverted. The fed funds futures market is predicting additional rate cuts. Good news for a liability sensitive balance sheet. Now, the instinct is to continue to keep funding short and ride rates down. That is certainly what the balance sheet wants. However, what the balance sheet does not want is a reversal in sentiment and for rates to go higher. Establish the discipline and discover how much term funding your risk profile may need. Particularly, if you are adding fixed rate loans in this falling rate environment.

Stay true to your risk position. Establish your macro-balance sheet strategy. Keep in mind, the best time to protect against rates going higher is when the market thinks rates are going lower.

Coming Up Next

Stay tuned for the next installment of The Dreaded ALCO Meeting: Five Big Ideas, where I’ll cover the final two Big Ideas to transform ALCO: Let the Data Do the Talking and Ask the Question, "So What?".

In the meantime, if you’d like more discussion of this and the other ALCO Big Ideas, I invite you to watch our recent webinar The Dreaded ALCO Meeting. Until then, we’d welcome hearing from you if you’d like to talk about transforming your own ALCO into a standing-room-only meeting.

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ABOUT THE AUTHOR

Joe Kennerson is a Managing Director at Darling Consulting Group. In this capacity, he works directly with financial institutions by providing solutions for their asset/liability management process in the areas of interest rate risk, liquidity risk management, ALM modeling, regulatory compliance, and executive-level education. He is a frequent speaker and author and directly advises clients in all aspects of ALM.

Contact Joe Kennerson at jkennerson@darlingconsulting.com or 978-499-8150 to work collectively to transform ALCO into a profit center.

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