Recently we had a meeting that few banks have. It was a rarity for us, but it was eye-opening for all that attended. It brought an important clarity about the future, a clarity that would be helpful for any bank to achieve, no matter what their size. This meeting was an asset-liability committee meeting (ALCO) of sorts, but it was also strategic.
When it comes to giving advice on saving money on college, our first advice is pick a college with a long name.You want to avoid schools with names like “Harvard,” “Duke” or anything with well-known initials, and suggest colleges like “West Oakdale Community College For The Commercial Transportation Arts.” For that matter, if essays are involved, you should probably suggest skipping it, as you want to look for a one-page application where three quarters of the page is focused on the utilization of how to use major credit cards. If the above advice doesn’t work out, we can
Let’s say you want to refinance a loan for a borrower that is at another bank and the loan has a prepayment penalty on it. The borrower has two options: 1) Refinance today and pay the penalty, or 2) Let the loan mature and then refinance at the then prevailing rate. We have tried all different methods and the way best to frame this problem is to present the solution in the following manner:
If you have spent some time in men’s locker rooms, then you likely know about the unspoken “naked man right away.” This regulation in the man-code stipulates that the least dressed man goes first should your paths cross simultaneously in a locker room. If you have a towel on, for example, you yield to the guy with only hair gel. This regulation permits safe passage and prevents getting hit with random body parts which is awkward at best.
Last week, Suntrust introduced their new savings platform called e-Savings that allows customers to open multiple subaccounts tied to their regular checking account. What is basically a modern redesign of the Christmas Club account, the platform allows bank customers to segment their funds for specific purposes thereby giving savers more control and accountability.
If you are feeling unlucky every time a loan prepays early then this will help. When banks originate a loan without a prepayment penalty or yield maintenance provision they are giving away economic value to the borrower – on average 7.2% of total loan value to be exact. While banks don’t take a principal hit, the impact is the same because the bank could be as much as 7.2% more profitable if they were to utilize a reasonable prepayment provisions.
Many banks have their certificates of deposits modeled on their asset-liability systems without optionality. That is, they treat the final maturity as gospel with little weight given towards repayment. This could be a mistake, as just assuming the forward curve is accurate, CD’s are set to exhibit about a 20% shorter duration than modeled. In a rising rate environment, banks are short the option value of a CD and thus are exposed to a market loss in the form of opportunity cost should the investor redeem early.
We monitor many banking schools and credit training programs and it is rare that we see anyone teach the analysis of a borrower’s interest rate risk position. For that matter, in hundreds of credit reviews that we see a year from a variety of banks, there is rarely a quantification of how rising or falling rates will impact credit risk.