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By James DeFrantz
In the last year, more than 82 new regulations have taken effect! Compliance and risk have taken center stage of the bank regulatory universe and that will be the case for some time to come. The twin missions of the regulators have become consumer protection and the managing of risk. Whether or not you agree with this approach, the fact of the matter is that compliance is one area where costs are rising and will continue to rise.
April 7 – Brink’s Global Payments, LLC, in partnership with NetSpend, a TSYS company and prepaid provider of choice to self-banked consumers and the brands that serve them, have announced the launch of the Brink’s Prepaid MasterCard issued by BofI Federal Bank. The Brink’s prepaid card appeals to consumers seeking peace of mind from a secure and stable money management solution. Consumers using the Brink’s card have access to many convenient and flexible features to accommodate their busy, on-the-go lives, including direct deposit up to 2 days faster1, 24/7 access to their account with an online account center and smartphone apps, virtual cards for online shopping and free online money transfers to other cardholders.
Enterprise Risk Management Frameworks Help Provide the Answer
Reviewing the roles of ALCO and directors
The FDIC Winter Supervisory Insights publication details in-depth the responsibilities of Management and Directors in an Asset Liability (A/L) process which results in effective management of the bank. We traditionally have viewed these reports and similar publications from the Federal Reserve and OCC, as meaningful blueprints for what future examination cycles could focus on. Dissecting these publications for parallels to specific issues impacting your Bank can serve as a step towards confident exam preparation. In this article, we focus on Board and Asset Liability Committee (ALCO) responsibilities outlined by the FDIC and recently published interest rate risk metrics by the OCC.
Earnings Pressure and the Rate Forecast Backdrop
The stubbornly slow economic recovery was difficult to diagnose early after the recession ended in 2009. The corresponding prolonged period of very low interest rates has confounded economic forecasters for the last five years. For example, according to the Blue Chip Financial Forecast in July 2009, expectations for the Fed Funds rate two years out (2011) was a whopping 3.26%. Contrast that with Fed Fund Futures currently trading around 1.25% – 1.75% in 2017. This misdiagnosis early on in the recovery had the effect of tamping down the willingness of many banks to extend 3-5 year fixed rate loans or add long-term assets to the investment portfolio – both common practices today. On the liability side, depositors too have been unwilling to tie up funds beyond 12 months resulting in ballooning non-maturity deposit balances across the industry.
In an effort to cover non-interest expenses and deploy capital, banks continue to find this environment difficult to navigate. This precise predicament was pointed out by the OCC as a key risk facing community and midsize banks. Persistently low rates and a slow growing economy have led to an era of incremental lengthening of assets, loosening of lending standards and short-term retail deposits.
With this backdrop, consider the oversight responsibilities the FDIC outlines for Bank Directors. According to the FDIC, “The usefulness of an IRR measurement system depends on the reasonableness of the assumptions that are used as inputs” and that the board of directors should complete a periodic review of the key assumptions used in the modeling process. This review is aligned with the ultimate responsibility the board has for the degree of interest rate risk taken by the institution.
Active director involvement is also cited by the FDIC as an important component in the ALCO process at well-rated institutions. Participating in discussions pertaining to policy exceptions and key determinants of changing risk profiles are noted, in addition to discussing pricing strategies and product mix with management in the ALCO meeting. On an annual basis the board has the need to assess the third party review of the ALCO process as well. In short, it seems involvement beyond cursory review of the current rate risk position and rate environments is the responsibility of an effective Board.
Asset Liability Committee Responsibilities
The ALCO Committee has both oversight and strategic responsibility. At the most basic level, ALCO specifically needs to review and approve the assumptions feeding the asset liability model and understand the interest rate risk position of the institution. In most cases, this needs to be a quarterly process at a minimum, but could be more frequent in times of quickly moving market rates, developing competitive pressures or new product introductions. Next, ALCO should continually discuss ways of mitigating risk, review impact of proposed strategies to interest rate risk, capital and projected earnings. After reviewing these potential impacts, it falls on ALCO to approve the strategies for management to implement and review going forward. Finally, ALCO maintains the responsibility to implement modifications to the A/L process based on annual third party review.
The recent rate environment places additional demands on ALCO. Growing regulatory attention on non-maturing deposit balances places the responsibility on Banks to develop and maintain pricing change betas and decay rates for these deposits. Additionally, diagnosing and modeling potential migrating behavior of these balances going forward should be analyzed by ALCO by completing change in deposit mix simulations to determine potential liquidity and earnings implications.
In the end, the A/L process is a key tool to manage interest rate risk, an item the FDIC calls “one of the most important jobs of a banker.” The process can be burdensome yet it’s incumbent upon us as bankers to use this process not only for regulatory compliance but also as the means to drive stable long- term earnings of our institutions.
The BOK Financial – Financial Institutions Group provides third party asset liability reviews, modeling, consulting, decay rate studies, and investment portfolio strategy. They can be reached at 866.440.6515 or learn more at www.boscinc.com/services.
© 2015 BOSC, Inc. Securities offered by BOSC, Inc., member FINRA/SIPC. Asset liability modeling, CD underwriting, portfolio accounting and safekeeping services are provided by BOKF, NA, an affiliate of BOSC, Inc. Investments and insurance are not insured by the FDIC; are not deposits or other obligations of, and are not guaranteed by, any bank or bank affiliate. The content in this document is for informational and educational purposes only and does not constitute legal, tax or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax and investment advice.
March 24 – Data breaches are increasingly impacting businesses across the globe, with the average cost paid by a breached organization reaching $5.9 million at the end of 2014. To provide a resource for payments industry stakeholders to understand the true impact a data breach might have on their organization, the Smart Card Alliance has released a new white paper, “The True Cost of Data Breaches in the Payments Industry.”
March 13 – First Internet Bank of Indiana, a premier provider of online banking services nationwide, has exceeded $1 billion in assets.
March 13 – PaymentsSource, providing news and analysis for payments professionals, has announced the honorees for the 2015 Most Influential Women in Payments. PaymentsSource will celebrate the accomplishments of these exceptional leaders on April 8th at an honoree panel discussion and reception, held during the 27th Annual Card Forum & Expo at the Chicago Marriott Downtown, hosted by PaymentsSource and American Banker.
March 13 – The acceleration of community bank consolidation presents a new set of challenges facing CEOs and bank directors to factor into their strategic decision making.
March 6 – Malauzai Software, a provider of mobile and Internet banking SmartApps for community financial institutions, has partnered with digital payments services provider Payveris to offer its clients faster payments services. The integration is being used by Dimmit, Texas-based First United Bank to provide account holders next-day person-to-person (P2P) payments in an effort to better meet the needs of its millennial customer base in a competitive banking market.
March 2 – Malauzai Software, a provider of mobile and Internet banking SmartApps for community financial institutions, has partnered with digital payments services provider Payveris to offer its clients faster payments services. The integration is being used by Dimmit, Texas-based First United Bank to provide account holders next-day person-to-person (P2P) payments in an effort to better meet the needs of its millennial customer base in a competitive banking market.