Some Shortsighted Bankers Persist in Playing Deadly Game of 'Chicken.' (Asset-Liability Review)
Baker, James V., Jr., American Banker
Less than a decade ago, asset-liability management did not exist as a subject of importance for senior bank managers. Elements of it were being practiced by a few individuals at various banks, but the extant banking literature was devoid of any articles or books on the subject and its fundamental principles.
In a very real sense, the evolutionary nature of asset-liability management began slowly and gained momentum after the October 1979 Federal Reserve massacre when it was decided to focus on the monetary aggregates and allow interest rates to seek their own level. Further impetus was provided by the move to deregulate interest rates plus on deposits.
Until the latter part of 1979, bank managements generally viewed credit and liquidity risks as the dominant risks they faced in banking. Events from late 1979 to 1982 convinced them that the time had come to address another risk that seemed overwhelming -- the interest rate risk. Accordingly, crash programs in defining, measuring, and managing the interest rate risk bega in earnest at banking laboratories throughout the United States, and the literature on asset-liability management began to explode. Written asset-liability management policies were adopted to augment written lending and investment policies, and asset-liability committees were formalized within the bank management hierarchy.
The bank regulatory agencies even got into the act when they belatedly began to recognize that banks were actually failing, even though they had no significant losses of principal on either their loans or investments.
Among the greatest difficulties inherent in being able to define the interest rate risk faced by banks, none was greater than the inability to generate meaningful volume and rate maturity data from existing general ledger systems. Numerous in-house computer staffs, correspondent bank processors, and service bureaus insisted they could not provide relevant data as a normal output of their existing systems, while many of those who could started charging special additional fees for providing such data.
Now, however, any firm that intends to offer general ledger data processing to banks must provide volume data by maturity, because the new call reports require banks to provide such information.
Events in 1983 were in marked contrast to the money market conditions that prevailed in the 1979-82 period. In 1983, there were only three changes in the prime rate; the fewest changes since 1969! By comparison, in 1979 there were 19 changes, followed by 52 in 1980, 29 in 1981, and 12 in 1982. The relative quietude was further reflected in the fact that the monthly average federal funds rate ranged from a low of 8.51% in February to a high of only 9.56% in August. In contrast, the range on the federal funds rate was 987 basis points in 1980, which saw a low of 9.03% in July and a high of 18.90 in December. Playing 'Chicken'
The relative calm in the financial markets has caused a significant degree of conplacency to pervade bank managements. …