Financial institutions generally will have monthly historical data on deposit pricing and deposit balances readily available. Those data provide an excellent starting point for developing an institution-specific model for deposit repricing and the resulting deposit behavior. But to fully understand what is going on with deposit balances, you should delve deeper into your depository data and consider what additional information it contains that would be critical for analyzing depositor and deposit behavior.
From late 2008 through early 2016, there was little need to examine core deposit repricing thoroughly. The target federal funds rate remained unchanged with an upper target of 25 basis points (bps) from December 2008 through December 2015 while the 1-year Treasury rate moved only a few bps from month to month, changing from 49 bps in December 2008 to 53 bps in February 2016. Since then, however, market rates have risen; the upper target funds rate has increased gradually to 2.50% and the 1-year Treasury rate has climbed similarly to 2.55%.
As new risks emerge, the role of the Risk Officers and Risk Managers has become far broader and more complex, covering everything from regulatory compliance, operations risk and credit risk to data management, advanced technologies and industry disruption. Because the industry is changing so rapidly, financial institutions are compelled to ask whether their financial risk leaders are keeping up, or more importantly, keeping ahead of the change. Moreover, if the institution is just keeping up, the follow-up question is whether this current pace is enough. In other words, does the institution have flexibility in its talent, organizational structure, process and policies to protect itself from evolving risks?
Over the last few years, the financial industry have questioned how much interest rates will rise and to what degree institutions are prepared. Compounding this uncertainty, community banks and credit unions have tried to cope with additional pressure to ensure sustainable profitability by tightening margins and cutting back costs. In response to these pressures, institution leaders have added to their balance sheet assets with longer maturities and more options. These products serve to diversify the balance sheet and widen margins, but in doing so may increase interest rate risk (IRR).
MountainView Financial Solutions, a Situs company and a leading advisor to the financial services industry, announced Monday that it has expanded its asset valuation solution to include Enhanced Daily Marks for a range of hard-to-value Level 2 and Level 3 assets. We interview Chris Kennedy, Managing Director, to learn more about the solution.
Q: MountainView has traditionally provided valuation services on a monthly or quarterly basis. Do the company’s current clients need more frequent marks?
The world we live in today features both high risk and high innovation. To some, innovation creates risk. The term “disruption” as at it relates to innovation indicates next-generation products, services and operations. The term “disruption” as it relates to risk management may stoke fear in the heart of the Chief Risk Officer.
If you ask a Chief Risk Officer what keeps a company running, the answer might be about strong foundational elements – identifying, prioritizing and quantifying risk – and implementing strategies and solutions to keep risk at bay.
When it comes to Interest Rate Risk (IRR) management, one thing is certain: Interest rates may rise of fall, altering how financial institutions approach the process. While some expect rising rates, and others expect a plateau, financial institutions should have a framework in place that can stand firm in any condition.
Consumer demand for mortgages is down, and lenders are trying innovative marketing tactics to raise their slumping production volumes. On top of that challenge, several wholesale or correspondent buyers are engaging in a price war that has caused several lenders to purchase loans at negative margins.
Despite predictions and announcements to the contrary, the Federal Reserve Board (Fed) might not raise interest rates at all this year.
That’s according to Richard Sheehan, Ph.D. and Senior Vice President, Analytics at MountainView Financial Solutions, a Situs company. He points to past years when the Fed consistently over-predicted the number of rate hikes it would carry out.
Welcome to the CECL time warp. When the FASB announced its CECL requirement in 2016, it seemed like there was an endless amount of time available to meet CECL 2021 implementation deadlines. Now, in 2019, the road to implementation seems like a speedy downhill drive in a car with squeaky brakes – except there are, in fact, ways to check the brakes along the way.
As an extension of last week’s article, subject matter experts and analyst from the Situs family of companies provided a few additional insights and trends to watch in financial services.
1. Uncertainty About How Marketplace Loans (MPLs) Will Perform in a Recession
“Origination of marketplace loans (MPLs) will continue to grow and steal market share from the credit card space,” said Chris Kennedy, Managing Director at MountainView Financial Solutions, a Situs company. “But there are many unknowns around MPL loan performance in a recessionary environment, and this could be troubling for leading platform providers.”
“I think there is a high and growing risk of a recession in 2020. You know, put it at odds of something like 1 in 3.”
Mike Fratantoni, Chief Economist and Senior Vice President of Research and Industry Technology for the Mortgage Bankers Association (MBA), delivered those words last week in a webinar hosted by MountainView Financial Solutions, a Situs company. Fratantoni shared an outlook in a broad to narrow scope that covered economic conditions, the housing market and the residential mortgage industry, and in each of those three areas he provided a mix of good and bad news.
FinTech advancements, digital banking and lending, AI and machine learning are all the buzz in financial services and will likely remain a highlight for 2019 discussions. However, analysts across Situs companies are looking at asset behavior, balance sheet risk and economic indicators that impact the foundation of the financial services industry. Here are five areas our analysts and advisors are watching in 2019:
“It is true, we shall be monsters, cut off from all the world; but on that account, we shall be more attached to one and other.”
— Mary Shelley, author of “Frankenstein, or The Modern Prometheus”
Reflecting on the current state of Artificial Intelligence (AI), one might say that in writing the novel “Frankenstein,” Mary Shelley unknowingly touched upon the fears and contradictions facing humans in the 21st century. Humans, in our desire to advance, are pushing the boundaries of innovation by creating intelligent thinking machines that could (in a worst-case scenario) become self-serving and fall out of the control of its creators.
Residential mortgage prepayment rates dropped in 48 states and the District of Columbia between the 12-month period that ended July 31 and the 12-month period that ended October 31. Nationwide, the average 12-month prepayment rate fell from 10.8% to 10.2% – a decline of 60 basis points (bps) – between the ends of the two periods.
For small and large institutions alike, financial models are growing more complex. Business leaders at financial institutions are more frequently relying on financial models to make informed and strategic business decisions, ranging from pricing and launching new products, to managing capital and setting reasonable internal risk thresholds.
In financial services risk management, there are risks that you can expect and prepare for, and there are risks that are out of your control, difficult to predict and can lead to serious setbacks for your institution.
Risk management activities for 14 of the largest holders of residential mortgage servicing rights (MSR) held asset values flat for the third quarter of 2018, according to the MSR Industry Report released last week by MountainView Financial Solutions, a Situs company. The largest gain among the 14 companies was 3.6% and the largest loss was -5.6%.
When it comes to financial services risk management, many financial institutions seem to have risk management nailed down, from system implementation through processes and governance. However, when analysts at MountainView Financial Solutions, a Situs company, dive deep into risk management discussions with industry partners, we find that even the most well-organized and well-staffed institutions require regular self-evaluation to determine whether their approach to risk management is both tactical and strategic. While many of the challenges we see are unique to a specific risk function, often such challenges are a byproduct of broader risk management myths that cause financial institutions to make costly errors. Here are three key myths to avoid when developing your risk management approach:
The marketplace lending industry has experienced tremendous growth in recent years, with loan originations on the rise and numerous new entrants, including some banks that are starting their own platforms or teaming up with fintech companies.
With the rewards of investing in the residential mortgage servicing rights (MSR) asset come significant accounting and management challenges. Many of those challenges are based on how frequently the asset can change in value and the overall opaqueness of what’s causing the change in value.
It is easy to generalize what rising interest rates mean to a financial institution’s risk management plan, but the current rising rate environment is somewhat different and has a few unique features that may alter risk management decisions for banks and credit unions.
What happens if right after you finalize your financial models and get ready to make critical pricing or balance sheet decisions, your head of risk modeling leaves your institution with little notice, and to your dismay, little documentation? While your former model developer was brilliant, your institution is now left with a range of financial models that may or may not be accurate or effective.
Jeff Prelle, Head of Risk Modeling at MountainView, a Situs company, served as conference chair at the CECL 2018 Congress Conference.
When it comes to Current Expected Credit Loss (CECL) planning, modeling and implementation, the consensus among financial institutions is that there is no consensus, because no two financial institutions are alike. At Situs, we often reinforce the importance of taking a strategic approach to CECL modeling and implementation. After all, CECL’s tentacles touch a wide range of functions within a financial institution, from model and credit risk to accounting and information technology (IT). But when it comes to achieving CECL milestones and tactics, what will work for one bank, credit union or lender may not work for another.
An official with Ginnie Mae recently announced a new initiative that seeks to address concerns about the liquidity of nonbank issuers in Ginnie’s single-family mortgage-backed securities (MBS) program.
As we approach 2019, banks and credit unions are focusing on liquidity, which has recently become a key focus of regulators who have highlighted a reduction in liquid assets at banking institutions. Since the 2008 financial crisis, banks and regulators have taken significant steps to monitor liquidity risk, but new liquidity concerns have emerged, and financial institutions need to ask themselves whether they can defend their liquidity risk management strategy to regulators.
While depository institutions are required to have their residential mortgage servicing rights (MSR) valuation models validated, other businesses don’t face the same regulatory requirements and are potentially missing out on the benefits of periodic validations.
Since the Current Expected Credit Loss (CECL) standards were finalized in June 2016, one major area of concern among bank and credit union CECL teams and their CFOs has been that the new set of loan loss calculations will require extremely granular and high-quality data.
There is a transparent market for newly originated residential mortgages conforming to the guidelines set by Fannie Mae, Freddie Mac, Ginnie Mae and loan aggregators. There is also a very active but much less transparent secondary market for loans that didn’t meet those guidelines and for seasoned loans that are performing, re-performing or non-performing.
In 2017, the FDIC released a paper, Community Bank Liquidity Risk: Trends and Observations from Recent Examinations, which outlines key challenges facing community banks and attempts to raise awareness on liquidity issues facing banks. Now, in 2018, a growing number of banks face funding gaps, creating a renewed interest in the FDIC’s paper.