Academic journal article ABA Banking Journal

The Headache: Challenging Rate Scenario Raises ALCO Stakes

Academic journal article ABA Banking Journal

The Headache: Challenging Rate Scenario Raises ALCO Stakes

Article excerpt

How have you changed your ALCO approach as the current low-interest-rate environment continues? You can read full answers and more headaches and remedies, and weigh in yourself, at www.ababj.com/blog/277.html

Remedy 1: Control where you can

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Curt Hoff, executive vice-president, United Bank & Trust, N.A., $107.8 million-assets, Marshalltown, Iowa

Our ALCO meetings have become more frequent and robust. Our committee recognizes we have no impact on the yield curve, but understands that we do have control of the structure of our balance sheet. We are striving for a better understanding of the elasticity of our clients on both sides of the balance sheet.

Identifying opportunities for realized gains in investment portfolio pieces in which there are credit risk and option risk red flags present is another shift in focus. In our shop, we have seen a subtle shift in focus from liquidity risk management and contingency funding to identifying the variables we have control of within interest rate risk management.

Remedy 2: Seek sticky public CDs

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Bryan Luke, executive vice-president, Hawaii National Bank, $577. 9 million-assets, Honolulu Our ALCO strategy has only slightly shifted from the strategy we have employed over the last two years. We have lowered deposit rates across the board to the absolute floor and are pushing longer-term CDs. We have secured public CDs by paying a few more basis points than we need to with the long-term in mind since they tend to be sticky in Hawaii. On the asset side of the balance sheet we are still not high on offering long-term fixed-rate loans and have made an effort to incorporate interest-rate-swap programs as part of the offering.

However, we are not actively working to keep effective duration on our investment portfolio to the 2.5-4 year mark anymore. We are open to letting it migrate up slightly between the 3.5 to 5 year mark if there is an opportunity to boost yield on new investments. The lack of good re-investment options is making it difficult to deploy liquidity effectively so we have actually seen overnight funds trend upward. Loan growth has been good, surprisingly, as we try to be as competitive as possible as long as it does not expose us to unnecessary risk.

Remedy 3: Review more often

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Debbie Koennecke, executive vice-president, Mansfield Community Bank, Mansfield, Texas (a division of Woodhaven National Bank, Fort Worth, $416. …

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