Post on 14-Oct-2020
transcript
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Dave WicklundDirector of ALM Advisory ServicesPlansmith Corporationdwicklund@plansmith.com
The Four Pillars of an Effective IRR Management Program
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Dave Wicklund• DirectorofALMAdvisoryServices(6+years)Ø Specializeininstitution-specificassumptiondevelopmentØ OverseeallPlansmithoutsourcingØ LeadALCO&BoardmeetingsØ RepresentclientsinregulatorymattersØ Providetrainingforregulatoryagencies,financialinstitutions,&tradegroups• FDICSeniorBankExaminer(20+years)Ø CapitalMarketsSubjectMatterExpert&ALMSpecialistØ Examiner-in-Chargeof75+examinations&visitsØ Developednation-wideIRRtrainingmaterialsØ AuthoredarticlesonIRR,IndependentReviewRequirements,&LiquidityRiskManagement
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• 40+YearsinBusiness• Schaumburg,Illinois(ChicagoSuburb)
• 1200+FinancialInstitutionClients• ALM,Budgeting/Forecasting,PeerAnalysis,&StrategicPlanning
• Educational&AdvisoryServices
Plansmith
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• BankersGPSØ CallReportData– UpdatedQuarterlyØ Web-BasedSystem(canbeoutsourced)
• FinancialCompassØ Instrument-levelInputsØ MonthlyUpdatesØ Client-HostedSoftware(canbeoutsourced)
• BudgetCompass• EducationalandAdvisoryServices
Plansmith Products & Services
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• CorporateGovernanceStructure• IRRMeasurements• IRRModelAssumptions• IndependentReviewProcess
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The Four Pillars of an Effective IRR Management Program
IRRDefinedInterestRateRiskistheriskthatCHANGING interestratesadversely
impactbothshort-termEARNINGS and theinstitution’slonger-termCAPITALPOSITION.
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BlackSwansandFatTailsRiskManagement-LowProbability/HighImpactEvents
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• CorporateGovernanceStructure• IRRMeasurementsandModeling• IRRModelAssumptions• IndependentReviewProcess
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• BoardandManagementOversight• IRRPoliciesandLimits• InternalControls
Corporate Governance Structure
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BoardandManagementOversight• Board
Ø Strategy,Policy,andLimitsØ ReviewModelResults(atleastquarterly)Ø ReviewAssumptions,Scenarios,andIndep.Rev.Findings(annually)
• Asset/LiabilityManagementCommittee(ALCO)• SeniorManagement
Ø ImplementStrategyØ RunModelandAdministerProgramØ ReportFindingstoBoard
Corporate Governance Structure
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PoliciesandRiskLimits• Responsibilities• EstablishParameters
Ø EarningsSimulations(12- and24-month)Ø CapitalValuation(NEV)Ø Non-parallelYieldCurveRisk
• ReportingRequirements• IndependentReview(audit)• PolicyExceptionProcedures
Corporate Governance Structure
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InternalControls• ModelControls• ReportingProcedures• PolicyExceptions• IndependentReview
Corporate Governance Structure
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üCorporateGovernanceStructure
• IRRMeasurements• IRRModelAssumptions• IndependentReviewProcess
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• EarningsSimulations• CapitalValuation(NEV)• Non-ParallelShiftsintheYieldCurve• ModelSensitivityTesting
IRR Measurements
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IRRMeasurements/Models
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IRRModels– EarningsSimulation- NII
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IRRModels– EarningsSimulation -NI
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IRRModels– CapitalValuation(NEV)
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IRRModeling- Scenarios• Static/No-Growth(NOT Dynamic/Budget)• Immediate/Shock(NOT Ramp/GradualRateChanges)•MaterialStressLevels(parallelupto+/-400bps)Ø -300/-400bps???Ø +500bps???
• 12- AND24-MonthSimulationPeriods• Non-ParallelChangesinMarketRatesØMeaningful ShiftsØ EarningsSimulationANDCapitalValuation(NEV)
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IRRModeling- YieldCurveRiskDefinition:Theriskarisingfromchangesintheslopeandshapeoftheyieldcurve,asshort-,intermediate-,andlong-terminterestratesusuallymoveindifferentways.
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YieldCurveRiskModeling
Source:FDICDirectors’ResourceCenter– TechnicalAssistanceVideoProgram“InterestRateRisk”
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YieldCurveRiskModeling– Plansmith’sCompass
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• StressTestKeyAssumptionsØ PrepaymentsØ Deposit/SharePricingØ DecayTerms
• TestEachIndependently
IRR Models – Sensitivity Testing
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üCorporateGovernanceStructureü IRRMeasurements
• IRRModelAssumptions• IndependentReviewProcess
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• Prepayments• Deposit/ShareRepricing• Non-maturityDeposit/ShareDecayRates
Key IRR Model Assumptions
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• PrepaymentsØ LoansandMortgageBackedSecuritiesØ Dynamicvs.StaticØ InstitutionSpecific
Key IRR Model Assumptions
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• Deposit/ShareRepricingØ ConsiderHistoricalData(FullRateCycle)Ø IncludeQualitativeAnalysiso RateEnvironmento Competitiono MemberDemographics/FundingConcentrationso PricingLagso “Surge”Growth
Key IRR Model Assumptions
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• Deposit/ShareDecayRatesØ AccountDurations(openandclosedaccounts)Ø Run-OffRates(volumeandbalance)Ø“Surge”Deposits/Shares
Key IRR Model Assumptions
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üCorporateGovernanceStructureü IRRMeasurementsü IRRModelAssumptions
• IndependentReviewProcess
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Independent Review Program (IRR Audit)
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1. Adequacyoftheinternalcontrolsystem2. Appropriatenessoftheriskmeasurementsystem3. Accuracyandcompletenessofdatainputs4. Reasonablenessandvalidityofscenarios5. Validityoftheriskmeasurementcalculations
***ASSESSMENT,NOTJUSTDESCRIPTION***
Independent Review Program
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Validityofriskmeasurementcalculations• Software/formulas/programmingcode• Resultsandassumptions
Ø Oftentestedbycomparingactualversusforecastedresults(a/k/aBacktesting)
Ø Benchmarking
Independent Review Program
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The Four Pillars of an Effective IRR Management Program
IndependentReview- Backtesting• Depthdependsoninstitution’ssizeandcomplexity• Onlyforearningsatrisk,notcapitalvaluation• Shouldcoveratleasta12-monthperiod(not3)• Includebothmodelresultsandkeyassumptions
Ø StartwithdirectionalconsistencyofmodelresultsØ Focusonkeymodelassumptions(loan/depositrepricingandassetprepayments)
• Whoshoulddoit?
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üCorporateGovernanceStructureü IRRMeasurementsü IRRModelAssumptionsü IndependentReviewProcess
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Plansmith’sALMAdvisoryServices•ModelAssumptionAssessment/Development• IRRandLiquidity(CashFlow)ModelOperation/Outsourcing• Backtesting• SensitivityTesting• ALMPolicy&CFPReview/Development• ALCOAssistance/Participation• Boardand/orSeniorManagementTraining• CapitalPlanningandStressTesting
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ThankYouforAttending
TheFourPillarsofanEffectiveIRRManagementProgram
DaveWicklundDirectorofALMAdvisoryServices
PlansmithCorporationdwicklund@plansmith.com
800-323-3281
The Four Pillars of an Effective IRR Management Program