MODERNISING BALANCE SHEET MANAGEMENT
R&C: Could you outline the challenges that banks are facing around asset liability management (ALM), liquidity and broader balance sheet management? In what ways has the coronavirus (COVID-19) pandemic impacted these challenges?
Ahluwalia: It has been a tough environment for banks in managing their financial resources and balance sheets. I would say post financial crisis, going back all the way to 2008, interest rates have been very low for over a decade. That is a key challenge when it comes to managing a bank’s balance sheet with the objective of maximising earnings and managing within the risk appetite of the bank. We did have a brief respite in 2017 and 2018, when rates rose a little and when you think about it, the Federal Reserve target increased to 250 basis points, which is still very low if we look at historical level rates. Banks are in the business of maturity transformation. They have deposits sensitive to the short end of the curve, and they tend to generate net interest income and net interest margin by investing in longer-term assets. When you have a prolonged low interest rate environment, you have these longer-term assets that mature and get reinvested in lower-yielding loans or securities. So that has been a key challenge, and it has been especially challenging given what happened after the pandemic broke. Rates quickly went back down close to zero and there was a lot of market volatility, fuelled by an uncertain economy and monetary policy, as well as the elections in the US. With all that uncertainty and low interest rates, it has been very challenging to position bank balance sheets.
Jul-Sep 2021 Issue
SAS Institute
Oliver Wyman
BNY Mellon