Ditch Your IRR Application Software

Category: Data Analytics
Type: Blog
Author: Tom Parsons

Let me take you back 20 years – it’s Y2K time and our firm (like everyone) is scrambling to either release new software or make existing software Y2K ready. We opted for the former and urged our clients to upgrade. Some did not. Fast forward about 5 years and I’m talking with a bank about finally letting go of the antiquated (DOS) version of our ALM software – here’s the funny part: the old software continued to work. But at what cost?

Three years later we had a systemic problem the old software would not handle. I tell you this story because although application software continues to “boot-up”, that doesn’t mean it meets the regulatory requirements enforced today. Another interesting fact: the original Joint Agency Policy Statement on IRR was released in 1996! But many ALM systems developed prior to that date did not adapt to the policy. Here’s an excerpt from that original release:

Evaluate the sensitivity and reasonableness of key assumptions--such as those dealing with changes in the shape of the yield curve or in the pace of anticipated loan prepayments or deposit withdrawals.

Sounds like non-parallel rate shocks and sensitivity testing. How many community banks practiced this prior to 2010?

How do you ensure you stay current with regulatory expectations when the reality is:

1. Regulators want more details than your current ALM model can provide and the person who oversees your ALM doesn’t have time to learn a new model, perhaps before a deadline.

2. You’ve lost staff and recruiting a replacement is costly - you have difficulty finding, attracting or keeping skilled ALM experts in your area.

3. It’s a niche role in the organization and not one that’s taught in college.

The answer is in the title of this post: Ditch Your Application Software.

Organizations that fall under regulatory scrutiny – financial services, health care, even consumer goods – find it difficult to keep up, so they outsource the work to others who make their living in highly specialized services. In the past ten years – really, since the peak of the recession – we’ve seen a migration from installed, application software to “please, no more, just do this for me”. The advantages are pretty obvious:

1. There is no software to purchase. The agreement is usually a subscription service and the model/software in use is updated continually, meaning you gain access to the latest regulatory required analysis without conversions, upgrades, and training.

2. Do the math – you’ll find that it will be more cost-effective to hire outside talent than to maintain full-time staff at the level of expertise necessary for properly managed ALM. Think

about recruiting, training, wages and benefits compared to the subscription service that is always up to date.

3. You have a third-party expert who can help you understand and explain results, with confidence, to the ALCO, Board, and Examiners.

4. Your results are typically available before the end of the month following the quarter end. Time to results can be inconsistent, particularly when an ALM manager is responsible for more than ALM. Results become dated quickly and knowing they’re ready at the same time each quarter end brings a sense of relief.

5. This is an independent view – no hidden agenda, they’re not trying to “game” the system to their advantage. I believe we hear this everyday as “transparency”.

Financial institutions are outsourcing many activities that are indirect to the business of banking – that is attracting new deposits and making quality loans. Global attacks by cyber criminals are diverting the attention away from the traditional day of a banker. CECL, the new accounting standard for ALLL is in its infancy but is very real and coming. Internal help-desk and IT support face the same challenges as ALM – attracting and keeping qualified staff.

NXTsoft, can take over these and other indirect banking activities. There is one certainty – the Joint Agencies will eventually come back to the guidance with additional requirements. Contact us to explore what we can offer your institution before the mad rush to comply.

June 27, 2019
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