Police Officers’ Credit Union
Conference
Intermediate ALM Strategies
Agenda
Foundation
Structure of the Balance Sheet
The Role of the ALCO in Balance Sheet Management
Balance Sheet Risk
ALM Strategies
The Landscape
The Role of Strategic Planning in the Structure of the Balance
Sheet
Balance Sheet Optimization
Structure of the Balance Sheet
Assets
Discretionary
Able to determine duration, liquidity and credit
Non-Discretionary
Duration, Liquidity and credit are determined by the member
Liabilities
Discretionary
Duration is determined by the credit union
Non-Discretionary
Member determines duration
The Role of the ALCO in Balance Sheet Management
Governance
Policies
Exposure Limits
Reporting
Strategic
Risk Management
Modeling
Compliance
Balance Sheet Risk
Credit Risk
Interest Rate Risk
Concentration Risk
Liquidity Risk
Vendor Risk
Credit Risk
Operational
Policies, Standards and Procedures
Underwriting
Appropriate credit risk assessment
Predictive credit risk modeling
Risk based pricing / Risk bases capital
Servicing
Proactive credit risk modeling
Interest Rate Risk
Basis Risk
Index pricing disparity between assets and liabilities i.e. LIBOR vs FF
Spread Risk
Spreads tighten and loosen during different rate and economic cycles
Duration Risk
Reprising disparity between assets and liabilities
Convexity
A function of mortgages
Option Risk
A function of caps, floors and call features
Concentration Risk
Managing a portfolio of risk
Borrower
Predictive modeling
Sector
Local and macro economics
Vendor
Fraud prevention
Loan Officer Underwriter
Training and fraud prevention
Liquidity Risk
Funding Availability
Seasonal cash flows vs. Loan demand
Contractual cash flows
Funding cost
Proactive cash flow management to
minimize cost
Leverage
Manage available lines pf credit and
borrowings
Vendor Risk
Loan purchasing / participation
Credit quality
Fraud
Loan Processing
Information Security
Fraud
Loan Servicing
Regulatory and legal risk
Balance Sheet Management Landscape
Innovation
Electronic Wallet
Credit Card vs Line of Credit
Mobile Banking
Member expectations
Instant access
Instant availability
Simple but powerful
Balance Sheet Management Landscape
Regulatory
Beyond Risk Based Capital/Capital Allocation
Risk Adjusted Return on Capital
RARO
Interest Income-Interest Expense-Operating Cost-Expected Losses
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Capital Allocation
The Role of the Strategic Plan in Asset/Liability
Management
Balance Sheet Management Enterprise Approach
(Driven by Member Needs)
Vision Statement
Financial Goals
Predictive Modeling
Ownership
Portfolio Level risk Management
Balance Sheet Management Transaction Approach
( Driven by Competition )
Do what the banks in the area are doing
Do what the other credit unions are doing
Financial engineering
Balance Sheet Optimization
Data Mining
Know your Member
Demographics
Need
Convert Data to Smart Data
Meet your Members were they are
Study Member Patterns
Balance Sheet Optimization
Drivers
Capital
Liquidity
Policy
Regulatory Constraints
Accounting
ALLL
Stress testing
Mark to Market
Balance Sheet Management
Questions & Answers