Pub. 16 2019 Issue 4

Issue 4 • 2019 21 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S — H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S It’s money in the bank. Y ou want your customers to grow and prosper. After all, their success adds to your bottom line. We can help them achieve their financial goals, because more money in their pockets means more money in your bank. CPAs Albuquerque: 505 843 6492 atkinsoncpa.com Henry South, CPA, CVA risk profile of the institution and lists potential liquidity events that could result in problems. These events could be market-oriented and only indirectly related to the bank, or they may involve issues specific to the institutions, such as credit or asset quality concerns, falling below a well-cap- italized position, unexpected asset growth, sudden loss of deposits or funding sources, or other negative liquidity developments. The ultimate effect of any single event should be taken into consideration, and the bank should game-plan alternative strategies in response. Investments and Liquidity Banks traditionally used the investment portfolio as a store of liquidity. This original purpose seemed to have faded somewhat as alternative sources of funding became available and widely used. Today, it may make sense for banks to revis- it the role of the investment portfolio as a vehicle for manag- ing liquidity. Proper identification of bonds and bond-types that provide reasonably consistent and predictable cash flow, as well as securities that are readily sold in the secondary market, is critical. The risk/reward relationship for securities should be viewed with an eye toward liquidity risk. When purchasing a bond or considering alternatives, portfolio man- agers should take a hard look at the cash flow uncertainty or optionality as well as the underlying price sensitivity. Scenario Cash Flow Analysis From a liquidity management standpoint, the ability to monitor the scenario dynamics of investment cash flows is extremely important. Projected cash flows under the existing rate environment are a necessary starting point but must be supplemented by additional projections for different rate scenarios. We know portfolios that contain callable bonds and/or MBS will experience faster cash flows when rates fall, and slower cash flows when rates rise. This asymmetry of cash flows and the degree to which those cash flows are uncertain needs to be calculated and reflected in an analytic reporting model. Liquidity risk management is obviously important in today’s environment from both a regulatory standpoint and from the perspective of prudent bank management. Having the right processes, tools, and management practices in place will help the bank maintain healthy performance and an optimal risk/reward profile. n Jeffrey F. Caughron is a Managing Director with The Baker Group, where he serves as President and Chief Executive Officer. Caughron has worked in financial markets and the securities industry since 1985, always with an emphasis on banking, investments, and interest rate risk management. Contact: 800-937-2257, jcaughron@GoBaker.com . Today, it may make sense for banks to revisit the role of the investment portfolio as a vehicle for managing liquidity. Proper identification of bonds and bond-types that provide reasonably consistent and predictable cash f low, as well as securities that are readily sold in the secondary market, is critical.