Balance sheet webinar series recap - Part 1: Know your investment portfolio

"Tackling Balance Sheet Management in a Volatile Market" Part 1: "Know Your Investment Portfolio: Risks and Implications for Your Business."

The ongoing raft of bank failures and an evolving regulatory landscape have renewed the focus on balance sheet, interest rate, and liquidity risk management. In a recent series of webinars, experts from Moody’s covered a wide range of topics including investment portfolio risk, liability and deposit side risk, how to employ a 5-step balance sheet playbook to navigate the current market dislocation with greater efficiency and confidence, and best practices in developing an effective ALCO. In this article we summarize the first webinar in the series “Know Your Investment Portfolio: Risks and Implications for Your Business.”

The first webinar in our series focused on how institutions should best employ investment portfolio risk management practices to navigate recent market dynamics, structural balance sheet interest rate risk, and short-term liquidity implications.

Blake Coules, Senior Director, Industry Practice Lead at Moody’s urges portfolio managers to “take control of the narrative as best you can,” by proactively speaking with auditors and regulatory examiners to assure them of your strategy. He stresses the importance of “providing transparency to all your stakeholders” during this crucial time.

Specifically, regulators are quizzing institutions on whether they have an integrated view of risk management, to ensure that leaders responsible for different areas of the balance sheet are actively and regularly engaging with each other. Examiners are also asking asset and liability managers to provide answers to “what if” questions based on the effects of changing rates on investment portfolios.

The key for bankers is to utilize portfolio management technology solutions that support comprehensive scenario stress testing. Such solutions should allow users to select along a wide range of variables, including duration/convexity, stochastics, rate shocks, prepayment multipliers, credit stressing, and decay stressors, all without modifying the investment instruments themselves. Other features like Monte Carlo scenarios and the ability to export data into tabular form are also key. And the outcome of the analysis should provide an actionable strategy that portfolio managers can then integrate into their institution’s risk profile.