Asset Liability
Management (ALM)
Liquidity Stress Testing
We provide liquidity stress testing to our ongoing asset liability management (ALM) clients because we believe credit, interest rate, and liquidity risk should be considered holistically.
Why Choose Us
We simply want what is best for our client. We offer independent fee-based advice, so we do not have financial bias as to the solution(s) an organization opts to implement. We recognize that financial institutions can meet their liquidity needs in different ways and we provide customized solutions to meet their objectives.
We believe effective liquidity stress testing requires a thorough understanding of our client’s balance sheet, business philosophies, operating procedures, and tolerance for balance sheet risk. We also believe that a thorough understanding of our client’s non-maturity deposits is a critical part of liquidity stress testing because they comprise 85% of the financial institution industry’s total deposits.
Our Approach
Our ALM engagement begins with a thorough review of our client’s ALM policies, procedures, Asset Liability Committee minutes, and reporting packages. We then have discussions with our client’s senior management team to better understand its goals, objectives, and tolerances for interest rate, liquidity, and credit risk. Our next step is reviewing our client’s financial statements for at least the past 10 years to understand the institution’s financial performance.
This context provides us with the information needed to develop our liquidity stress testing. For example, a client could have a significant number of investments that could be sold to meet liquidity needs. We would want to understand the liquidity and duration risks to determine whether this would be a financially viable approach. As another example, a client could have a high loan-to-deposit ratio with a concentration in residential real estate loans. We would want to ensure that the loans are eligible collateral for borrowing and consider the level of advance rates under varying interest rate and credit conditions to ensure our client has the necessary funds to meet disintermediation demands.
We always consider non-maturity deposits, recognizing that forecasting non-maturity deposit behavior is difficult because they contain two embedded options:
- The financial institution holds the option to determine the interest rate to offer the depositor, while;
- The depositor holds the option to withdraw all or part of the account balance at par.
As a result, we approach our non-maturity deposit analyses holistically. We review the performance history for each account considering the organization’s strategies regarding account design and offering rate. We benchmark our findings to our overall industry performance studies and cost estimates.
We then develop multiple methods for our clients to meet their potential liquidity needs in the context of their balance sheet, their goals, and the requirements of their primary regulator.
FEATURED
This September 2016 PowerPoint shows how measuring interest rate and credit risks on an integrated basis can lead to more informed loan pricing and better decisions regarding asset mix and the resulting capital at risk.
WHAT OUR CLIENTS SAY
“Wilary Winn’s expertise is a critical component in our risk assessment balance of maintaining current income coupled with appropriate and realistic evaluations of various scenarios […]”
– Michael Harden, Executive Vice President & CIO, F&A Federal Credit Union – Monterey Park, CA