3 strategies for bank financial preparedness 

3 strategies for bank financial preparedness

A liquidity crunch is looming for many banks. Prepare for the challenges ahead with these strategies.

Getting a clear window into your bank’s sources of funds, liquidity, and capital is especially important in times of economic turbulence. And right now, uncertainty about unemployment, viability of businesses and even entire industries, and government assistance efforts all point to the need for understanding your current and future liquidity situation. Any – or all – of these issues could cause a lot of money to flow out of your business abruptly if circumstances play out badly.

Obtaining a better view of your bank’s liquidity begins with a mindset shift. Specifically, this entails moving toward more frequent examinations of your credit risk, understanding the potential demands on your deposit funds, and managing capital plans by taking a future-oriented look at what’s possible, good or bad. This can help you avoid major unpleasant surprises with respect to large or unexpected deposit withdrawals and, of course, loan losses.

Our team of banking specialists has identified these three strategies to help you prepare for a potential capital crunch.

1. Dynamic cash flow forecasting

Many banks currently perform quarterly static forecasts – driven in large part by regulatory obligations – to assess their cash flow. This point-in-time exercise measures the short-term impact of rate shifts, margin, and the economic value of equity, but it doesn’t account for possible changes to the balance sheet. 

A dynamic report that projects cash flow on a daily, weekly, monthly, and quarterly basis provides better insight to manage large loan portfolios, investments, and sums of money. It offers an opportunity to evaluate the potential impact of your strategy on balance sheet changes. It even allows you to assess how balances could change if you introduce a new product or adjust your pricing. And though the regulators still require quarterly forecasts – at a minimum – they generally are in favor of a more dynamic model.

2. More frequent asset and liability modeling and analysis

Again, most banks are looking at their portfolio assets and liabilities on a quarterly basis. But more insights can be gained by moving to monthly – or perhaps even more frequent – modeling and analysis. This process also can benefit from having broader and more dynamic participation in the analysis and discussions.

The advantage to this approach is a more current, thorough, and accurate view of the potential demands on the asset and liability posture of your bank. The process needs to drive your depository and borrowing plans – with the goal of lowering your long-term cost of funds by providing information that can help you improve funding tactics through borrowing ladders, special-term deposit products, and other funding arrangements.

3. Recurring meetings between the finance and retail teams

Finance and retail banking teams should communicate regularly and often, especially now. Conversations about pressures the retail side is facing and broader market views from the finance side can drive a better working relationship that is more nimble, responsive, and adaptive, which can help the bank formulate the right strategies for the various product lines in its markets.

For instance, if the retail team wants to raise the money market account rate, the finance team might instead want to counter with a recommendation to borrow some or all of the desired funds. But a back-and-forth conversation could result in landing on an aggressive short-term increase in deposit pricing to take advantage of local market opportunities to grow the bank’s customer base. It might be that neither strategy is wrong or right, but communication, coordination, and timely actions between the front office and the finance team can allow the bank to capitalize on market opportunities while managing funding risk associated with growth opportunities.

Drive better insight into your liquidity challenges

Get assistance executing these and other strategies for strengthening your cash flow. Our banking specialists can apply decades of deep industry experience to help your organization prepare for the uncertainty ahead .
Brian Nappi
Brian R. Nappi
Managing Director, Financial Services Consulting