Page 8 - 4Q 2016 Reporter
P. 8
Managing the Balance
Sheet in a Changing
Environment
by Jim Clarke, Ph.D., principal at Clarke Consulting,
Jim Clarke Villanova, Pennsylvania
The key responsibilities of the ALCO are the From November 7th to November 28th the rate
management of liquidity, and interest rate risk. on the two year Treasury note increased 32 basis
These responsibilities have been a challenge points; the five year note was up 59 basis points or
in 2016 primarily due to changes in the yield 49%; and the 10 year note was up 67 basis points
curve in mid-year (Brexit impact). As we enter or 42%. It is too early to predict whether rates will
2017 your bank’s ALCO is facing another event hold at these levels, but it is hard to believe the 10
causing changes to market interest rates, the 2016 year is moving back to the 1.70% range.
Presidential election. The current post-election
Business Cycle, Interest
changes for the most part are positive, but the
question facing bankers and forecasters is: How Rates and Liquidity
permanent is the optimism towards economic
growth, and is the new interest rate environment Management
just a short-term reaction or will the steepening The U.S. economy is seven and on half years
slope of the yield curve continue through 2017? into an expansion and the Fed Funds rate is 75
Economic data has been very positive in the basis points [I’m assuming a 25 basis point increase
4th quarter of 2016: 3rd quarter GDP growth in December 2016]. At this point in a normal
was revised to 3.2% and the 4th quarter growth business cycle, the Fed Funds rate would have
appears to be strong. Consumer spending is pushed above the long-term average of 3.30%. The
rising along with consumer confidence. The present situation creates a serious dilemma for a
housing market is strengthening along with the bank’s ALCO. At this point in a business cycle the
labor market. The unemployment rate is 4.6% consensus forecast would be a decline in market
and wages are beginning to rise. All of this activity interest rates relatively soon; and therefore balance
is moving inflation rates to levels desired by the sheet management would be straightforward:
Fed. All of this positive news bodes well for bank lengthen asset duration and shorten liability
lending, but should be a caution sign for liquidity duration. But in the current business cycle the
management. expectation is for rates to increase, not decrease;
Short-term interest rates are certain to be therefore avoid liquidity risk and become more asset
increased at the December 2016 Fed Open Market sensitive.
Committee meeting, and if the growth of the Recent developments are encouraging; that
economy remains strong, and inflation continues to is, market interest rates are beginning to move
rise the Fed will surely move the short-term rates higher which is normal at this point in a cycle, but
up more aggressively in 2017. Intermediate and we have a long way to go. Look at the positive
long term rates are the major post- election stories. results of rising intermediate and long-term rates
5
Fourth Quarter 2016 IllInoIs RepoRteR
