If there’s ever been a time for care in asset liability management (ALM), it’s now. The biggest obstacle today seems to be the unwillingness to price deposit money at market rates.
What with plenty of liquidity, less than stellar loan demand, low rates of return on investments (the liquidity), and a reluctance (on the credit union’s part) to lower savings rates, even though it can’t be loaned out…
What’s a credit union to do?
Keep it simple!
First, make sure you pinpoint a target gross spread (GS). GS is the difference between the return on earning assets and the cost of funds. It is the essence of good ALM.
If you set a target and hold to it, it will help eliminate some of the temptations that come during pricing decisions (particularly on the deposit side).
Next, strive for a consistent GS. This will be done primarily through pricing. In theory, you would like to see your pricing changed in lock step on both sides of the ledger. This, however, is very nearly impossible. So, you must strive to adjust pricing (on both sides) so that you can maintain your GS within a 40bp range.
So, it isn’t hard - this ALM business. You just have to set a solid target and demonstrate discipline to reach that goal.
1 comment so far
1 Steve Bentley // Jul 3, 2009 at 11:28 am
Right on! After being in the business for 25 years, I have always strove to achieve a 500 basis point spread. To do this, you need to price deposits at market rates. In our market area, other credit unions continue to pay 1% or higher on regular shares while most banks are between 10 and 25 basis points. I will never understand the propensity for credit unions that desire to pay such high rates. Of course, in our case, we charge very little if anything for fees, so we have to rely on making money the old fashioned way….by managing the interest spread…now that’s ALM!
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