Community banks are known for their relationship-based business model, which comes with risk management “built in.” But when it comes to balance sheet management, there are now tools that can help automate and streamline this process, helping them make decisions faster.

Quick Stat


The estimated size of the global market for risk management software by 2028

Source: Grand View Research Inc.

While large banks have “full desks” dedicated to asset liability management (ALM), at community banks it tends to be either managed by the CFO or chief revenue officer on a quarterly or semiannual basis, says Mehdi Bouasria, product general manager, treasury and capital markets business unit, for UK-based Finastra.

But with the pace of interest-rate change and regulatory pressures, a more frequent check-in makes sense. 

“There’s now a shift to do it at least on a monthly basis, if not a weekly basis,” Bouasria adds. Fortunately, there are technological solutions that can help manage this faster pace.

Balance sheet risk management technology

In March, Finastra rolled out Finastra ALM IQ, a cloud-based software-as-a-service balance sheet management tool specifically geared for community banks, based on an existing solution for large banks, Finastra ARC. “ALM IQ is a scalable version of ARC for small- and mid-sized banks so they can face today and tomorrow’s challenges with banking book risk,” Bouasria says.

Finastra’s new solution gives bank managers a deeper understanding of their balance sheet structure and risk management position through dynamic modeling and simulation to meet the expectations of regulators and supervisors, Bouasria says. This approach also supports the rapid development and testing of new products in response to interest rate fluctuations and other economic drivers.

For example, bank managers could determine the impact of a more aggressive deposit strategy on the bank’s future cash flow and balance sheet positions, he says. For loans, bank executives could stress test hypothetical variable rates versus fixed rates to determine how each scenario would impact their future profitability and net interest income.

“We are doing the heavy lifting, lowering the cost of ownership in a dramatic manner,” Bouasria says. “CFOs can now focus only on their job, which is monitoring risks and optimizing the balance sheet, and they don’t need a whole team dedicated to ALM.”

Balance sheet management is “ever evolving” with the overall needs of the industry, says Matt Motyka, senior vice president, assistant treasurer at $15.2 billion-asset Seacoast Bank in Stuart, Fla.

“It first starts with human capital, bringing in the most knowledgeable and insightful hires that we can to think strategically and be nimble in different economic environments,” Motyka says.

Other vendor applications, including Empyrean Solutions, PrecisionLender (Q2) and DerivativeEDGE (DerivativePath) also play an integral part in managing the asset/liability profile, he says. Such tools are also useful for planning and budgeting, performing liquidity and capital stress testing, quantifying loan and deposit profitability and providing the ability to shift exposures rapidly.

Modernizing risk management

One consideration for community banks is the adoption of newer, more modern balance sheet management solutions, says Chris Maclin, CEO of Empyrean Solutions in Woburn, Mass.

It’s important that community banks analyze large amounts of information quickly and efficiently, he says.

Newer platforms, such as Empyrean Solutions, can leverage one set of cash flows for multiple purposes, he says. With one calculation, a bank manager can understand the institution’s ALM position, liquidity stress tests and deposit assumptions. The manager can even integrate the net interest margin into a comprehensive budget and forecast that can be stress tested.

Many banks are hesitant to upgrade their risk management solutions, Maclin says. In many cases, these models have been in place for 15 to 20 years at a time when rates were not as volatile as they are today.

“The ability to both isolate and combine risk factors ... helps give us the information we need to make sound decisions and quickly adapt as new challenges arise.”
—Kevin Harwick, Bar Harbor Bank & Trust

“The ability to support the CFO and executive team with timely forecasts and scenarios under a variety of rate and economic conditions has never been more important,” he says. “In addition, the time to implement and the simplicity of rollout is much shorter than in the past due to the adoption of cloud technologies.”

The CFO’s changing role

In many banks, the office of the CFO is being transformed, enabling the CFO to collect, organize and report a broader array of risk and finance data “faster and more efficiently than ever before,” Maclin says.

“The days of siloed risk and finance solutions that don’t share data—or even worse, provide conflicting information—are over,” he says.

Bank balance sheet management has always been a challenge of trying to minimize risks while maximizing returns, says Kevin Harwick, vice president, asset liability manager at $3.9 billion-asset Bar Harbor Bank & Trust in Bar Harbor, Maine. 

However, the speed and intensity of recent risk events that resulted in multiple bank failures demonstrates the importance of having sound balance sheet management policy, along with “an agile all-encompassing” ALM software, Harwick says.

Bar Harbor Bank & Trust uses Empyrean to isolate how different rate movements affect earnings at risk and value at risk, to test how different stress scenarios would affect the bank’s liquidity position and to test how certain stress scenarios would affect capital levels.

“The ability to both isolate and combine risk factors, along with the speed at which we are able to add new variations as they become relevant, helps give us the information we need to make sound decisions and to quickly adapt as new challenges arise,” Harwick says.