At Huron Consulting Group, we are seeing a re-emergence of managing and measuring the crucial link between risk and return, and understanding the significant interplay between liquidity, market, and credit risks. Over time, we've seen these efforts become separated and siloed in many organizations.
Today, best practices and regulatory pressures drive a more integrated view of managing the balance sheet and net interest margin. These regulatory and accounting pressures-such as the Dodd-Frank Act stress testing (DFAST), comprehensive capital analysis and review (CCAR), and current expected credit loss (CECL) also drive significant changes in analytical processes and tools. They must now pass the same control, auditability, and overall accounting rigor as traditional financial accounting and core processing systems.
A great example of this is a recent directive from the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) (SR 16-3) that mandates liquidity risk be a fundamental part of a bank's approach to funds transfer pricing. A traditionally internally focused analytical methodology, transfer pricing now must focus on both liquidity risks and market risks in driving bank's decisions. In other words, this integration isn't a nice-to-have—it's now a must-have.
And of course, although the interplay between risk and return is important for measuring historical activity, it is now a must when developing plans and forecasts. If you think about it, this really is a sea-change: Both regulation (DFAST, CCAR) and accounting standards (CECL) are not just based upon historical results, but on projections of future results as well.How do these business challenges translate into technology challenges—and how do they impact bank CFOs?
From a technology perspective, we are seeing these changes manifest themselves in a couple of ways. First, systems and models need to be integrated from the beginning, not cobbled together after the fact. An asset/liability management system can't stand apart from core budget and planning activities to adhere to CECL requirements and projections of future cash flows, and customer behavioural models can't stand apart from efforts to determine expected future credit losses that will drive today's allowance for loan loss.
Second, because this information is used for formal regulatory submissions and published financial statements, the systems supporting them must adhere to the same standards as core accounting systems.
Finally, because of regulatory pressures, bank CFOs increasingly look to cloud-based delivery models for technology to quickly develop solutions that meet these tight regulatory timelines. In a research report conducted by Anaplan and the Financial Times, 62 percent of the surveyed banking executives acknowledged that they didn't respond effectively in their planning process to the regulatory demand.Huron has just released a Margin Planning for Banking app on the Anaplan App Hub. What are the benefits a platform like Anaplan can provide bank CFOs, and what issues does the Huron app solve?
Our margin planning solution answers the desire to deliver a comprehensive planning application integrating both risk and performance management. Every decision or forecast amount within a plan reflects both the impact to margin and the bottom line, but also to credit, market, and liquidity risks. The system is additionally designed to immediately reflect the impact to required capital and the rest of the balance sheet of any plan, budget, or projection.
In order to tie together operating budgets and plans with stress tests, the app makes it easy to swap alternative future scenarios and easily see the impact of these economic stresses against the bank's core plan.
Here at Huron, we know that one size doesn't fit all, so the app is designed to be flexible and adapt to the needs of each individual bank. The app leverages the Anaplan platform's agility and quick time-to-value to shorten project lengths and meet regulatory deadlines.
For more information, read Huron's white paper, "How connected planning helps banks improve margin management" and check out the Huron Bank Margin Planning app in the Anaplan App Hub to learn how Anaplan helps improves margin planning and regulatory forecasting.