We encourage banks to spend 5-10 minutes at the beginning of each ALCO meeting focusing on the economy and interest rates. We believe it’s worthwhile to have some level of consensus within the committee about the projected direction of market rates before discussing the bank’s interest rate risk position and other elements of the balance sheet.
The materials presented should be consistent at each meeting and allow each member, and the group as a whole, to draw a conclusion, at a minimum, about the direction of rates.
We suggest a presentation (see .pdf) comprised of the following components:
- Rate Forecast
- Curve Steepness
- Credit Spreads
The first three components are presented on individual slides, with notes to provide additional context. For our rate forecast we use Blue Chip, however, there are a variety of other forward looking curves and indices that may be utilized. Graphs comparing ten year rates against the two year and fed funds, respectively, provide perspective as to the steepening or flattening of the US Treasury curve. Finally, we present comparisons of the Moody’s seasoned Aaa and Baa spread to fed funds.
The goal of the discussion should be to identify the anticipated direction of rates and the timing and/or magnitude of future movements. Determine if these expectations are consistent with the rate forecast used in your ALCO model.
Use your expectation of future rate movements further in the analysis of the bank’s interest rate risk position, pricing for loans and deposits, and identifying potential liquidity events created by rate movements.
Granted, there are other indices and data available, however, the aforementioned should provide you with a blueprint for a consistent and efficient discussion at each ALCO meeting.
Understandably, it’s easier to insert any one of the many economic presentations you receive on a daily basis into the ALCO package and call it good. In addition, historically it hasn’t always been easy to compile economic presentations without a Bloomberg or team of analysts. This is changing as the Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), Federal Reserve Economic Data (FRED) online research tool, Bloomberg online and multiple other online sources are making it increasingly easier to customize a presentation to promote an effective discussion at your ALCO.
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