Banks, credit unions and other financial intermediaries have larger and more diverse balance sheets than most other types of business – and correspondingly larger amounts of balance sheet risk. Pricing can change, sometimes quickly, across a range of earning assets, as it can on interest-bearing deposits, with potential mismatches (in maturity, in repricing profile) between them creating interest rate risk (IRR) exposure. In fact, balance sheet IRR exposure ranks up there behind credit exposure in terms of a typical institution’s loss vulnerability.
Our IRR audits drill into not just the standard governance and control issues (e.g., the requisite policies and procedures; Board vs. ALCO vs. management’s roles and responsibilities; the completeness and integrity of reporting provided to them) but also key aspects of the IRR modeling: data input integrity; the reasonableness of the underlying assumptions; the accuracy (including back-testing) of the model results; and the reasonableness of those results vis-à-vis balance sheet composition, gap analysis, past earnings patterns and other factors or benchmarks.
Funding an institution’s assets requires careful management and control of on- vs. off-balance sheet liquidity sources, including due planning for contingencies. Getting it right can quite literally determine an institution’s survival – or, more positively, its ability to create and sustain growth. A Liquidity Risk audit can provide the Board valuable assurances in this critical arena. There isn’t the same regulatory imperative for regular audit as there is for IRR, but if liquidity concerns are on the Board’s radar screen, as they now are for regulators, then a periodic liquidity audit is certainly worth considering.
If liquidity is the key driver of short-run survival, in the longer run it is capital. A Capital Management audit can help assess the effectiveness of the controls surrounding the determination of how much capital an institution requires, the recognition of contingencies, and the measurement and reporting of capital for accounting, regulatory and management purposes.
A final, key ALM component is the investment portfolio, whose importance will of course vary with its size and complexity. Enhanced requirements apply for credit analysis, both initial and ongoing, of (non-Treasury, non-Agency) securities holdings; CECL requirements will add further complexity to this process. More generally, growth in the industry’s aggregate holdings have translated into heightened examiner scrutiny. Our full-scope Investments audit considers all relevant aspects of the governance process; purchases and sales; portfolio monitoring and reporting; and applicable accounting guidance. We also regularly perform audits of clients’ BOLI (Bank-Owned Life Insurance) programs, for the due diligence, annual BOLI reporting and other requirements of FIL-127-2004.
AuditOne does not assign generalists to any of our audits, including the ALM. Our auditors have deep experience as CFOs, regulators or market risk specialists. As with all our practice areas, that expertise can also be put to work in an advisory capacity if needed. Call us for more information on how we can help.
David Kellerman, ALM Practice Director, has over 30 years’ experience in banking, including CFO role at several community banks. David holds a CPA license, as well as an MBA from Ohio University.