ALM Goes to the Front of the Line

Regulators are coming down on CUs that don't do thorough ALM.

November 26, 2010
KEYWORDS economic , regulators
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For most credit unions, asset/liability management (ALM) has been a “get in line” topic: Get in line behind security, marketing, loan origination and tracking, member relationships, and a host of other pressing matters.

Until now. Credit unions are looking more intently at ALM for a simple reason: Regulators are coming down hard on financial institutions that don’t do thorough ALM.

“We’re seeing increased interest in ALM among financial institutions,” says Kevin Haffner, group president of performance solutions at ProfitStars®. “ALM has taken a back seat over the past 10 years. But regulators increasingly are scrutinizing financial institutions in the wake of the economic downturn and recent banking crises. They want to make sure nothing else happens on their watch. Credit unions now must stress test their balance sheets more often and more strenuously than before.”

“ALM often amounted to just checking a box,” notes Deby Smith, area vice president of sales/financial solutions at Open Solutions Inc. “But in the past six to eight months I’ve seen a more active approach to ALM, including more hiring of ALM experts in mid- to large-size credit unions. Also, credit unions are growing their deposit base, and rapid growth brings more factors to consider. Add to that the realization that credit unions are now being scrutinized more intensely.”

“Historically, financial institutions of all sizes have taken a minimalist approach to ALM,” says Tom Parsons, director of consulting services at Plansmith Corp. “But examiners no longer tolerate this. That means credit unions may have to run more than one or two scenarios. They could be forced to run several scenarios based on both expectable events and catastrophic events.”

Parsons believes the current monetary policy of low interest rates seems to be working and will probably last through the end of 2011. “At that time there could be a risk of sustained rising interest rates,” he says. “Financial institutions have to be prepared for rising rates, but the related topics of liquidity and contingency funding are little known or understood. Lack of attention to liquidity has created a sense of complacency, which in a rising interest rate situation becomes very important.”

Previously, says Parsons, it was easy to predict which core deposit accounts would stick around. But consumers are becoming more rate-sensitive, which could affect credit unions’ liquidity in a rising-rate environment.

“Credit unions will now need to forecast and test different scenarios’ effects on liquidity,” he says, “and then plan for how they might retain existing accounts and acquire new accounts. Those steps are what examiners are looking at closely.”

Haffner agrees that when interest rates eventually rise, consumers will seek higher returns. This will beg the question, how will financial institutions retain consumers’ deposits?

“Regulators are scrutinizing credit union liquidity and contingency plans,” he says. “Fortunately, they have been more proactive recently about what they’re looking for, which will aid deposit retention.”

Next: In-house vs. outsourcing

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