Assess, Plan, and Effectively Respond to Today’s Market Challenges

July 18, 2023

By: Jerry Sutherin, President & CEO

In today’s dynamic market, some of the biggest challenges faced by our clients include but are not limited to interest rate risk management, liquidity, capital adequacy, and commercial loan underwriting. These issues are magnified by the ability of our clients to locate, hire, and retain quality human capital to operate effectively and efficiently.

Interest Rate Risk Management

Rising or fluctuating interest rates impact your financial institution’s growth prospects in both the short and long term. Not only do interest rates pose a risk to a financial institution’s balance sheet, but they also impede the ability to effectively produce reliable financial statement forecasts. A financial institution’s Net Interest Margin (NIM) is a key component of each income statement. Being able to adequately forecast interest income as well as internal cost of funds allows an institution to produce a reliable budget. To overcome this, financial institutions must identify, measure, monitor, and control interest rate risks to meet the requirements of the Joint Policy Statement on Interest Rate Risk (IRR) and the IRR regulatory guidance. Effective control of the interest rate risk will require conducting annual independent reviews of the asset liability management (ALM) function and validating your risk measurement systems to ensure their integrity, accuracy, and reasonableness. This will also involve internal controls of loan and deposit pricing. Establishing and maintaining these controls should begin at the board level and flow through management.

Credit Risk Management

Rising interest rates have also had a profound impact on credit quality of commercial lending, one of the primary drivers of revenue for most financial institutions. The change in credit quality results in the tightening of credit standards throughout the industry and by the regulators. Being able to effectively underwrite loans and mitigate risks within a commercial loan portfolio is a function of having seasoned staff to manage these processes. Lack of quality credit talent exposes financial institutions to otherwise preventable credit risks. The dilemma for most financial institutions is finding, hiring, and maintaining experienced personnel. In some instances, this has resulted in inadequate credit presentations being prepared by unqualified individuals or loan officers underwriting their own credits for approval. The increasing burden of inflation and wages adds another layer of complexity to the mix. Many community-focused institutions are not willing or able to pay top rate for talent, which is understandable given the need and focus to remain competitive among the larger regional and national banks that continue to acquire and/or out-compete them.

Liquidity Risk Management

Another impact of a higher interest rate environment and inflation is the disintermediation of funds or liquidity from financial institutions to other financial intermediaries. Sound liquidity management is crucial for controlling your organization’s liquidity risk and managing cash flow to meet expected and unexpected cash flow needs without adversely affecting daily operations. Your financial institution should assess the range of possible outcomes of contemplated business strategies, maintain contingency funding plans, position for new opportunities, and ensure regulatory compliance and the adequacy of your risk management practices.

Capital Planning

Both interest rate risk management and liquidity management have a direct impact on the capital adequacy of all financial institutions. Capital contingency planning will ensure that your financial institution maintains the required level of capital through any realistic stress event. Periodic review of minimum capital requirements and stress tests can provide valuable insights and will maintain your standing with the regulators.

The Importance of Strategic Planning

So far, this article has only discussed the challenges faced by the financial institution industry. These obstacles are not just management issues. They are also issues that boards of directors must navigate as well.

Are there solutions? Absolutely — yes there are. Boards of directors and management must be aligned on all strategic initiatives. These objectives need to be derived and adopted by the board and conveyed to management. The most common approach is through a focused strategic planning session involving the board and management. The outcome of such a retreat will enable the board to identify goals and risks faced by the organization while also deciding on how the goals will be accomplished and the risks mitigated. This could be through the utilization of qualified internal staff or engaging outside experts to assist with each objective. An effective strategic plan will incorporate all these pieces to help guide your organization as you navigate the changing industry landscape.

Partner With Us for Success

For 45 years, Young & Associates, Inc. ( has partnered with banks and credit unions across the country to provide consulting, outsourcing, and educational services to minimize their risk and maximize their success. Our services cover areas such as interest rate risk analysis, liquidity planning, assessment of capital adequacy strategic planning, regulatory assistance, internal audit, independent loan review, IT audits and penetration testing, and regulatory compliance assessment, outsourcing and training. Our team of consultants boasts an unmatched level of industry experience and is comprised of former banking executives, compliance regulators, and tenured finance professionals who have personally experienced many of the same issues you face at your organization.

For commercial credit needs, Y&A Credit Services is a full-service provider of outsourced underwriting services and credit analysis. An independent entity, Y&A Credit Services offers the same exceptional service, expertise, and integrity you’ve learned to expect from Young & Associates, Inc., and provides commercial credit underwriting and credit approval presentations, annual underwriting reviews, financial statement spreading and analysis, and approval and underwriting package reviews. We’ll work with you to improve the quality, speed, and accuracy of your lending with a solid focus on minimizing your credit risk. Our team members are experts in credit services and the financial industry and include former chief credit officers and senior credit analysts from both community and regional banks and provide full outsourced credit department services to our clients, keeping their costs low so they can remain competitive in their markets. Our seasoned credit professionals boast a combined 100+ years of experience in credit administration which helps mitigate risks while assisting our clients with safe and sound underwriting processes.

We look forward to assisting your bank or credit union in meeting these challenges head on. Find out more about the many services we provide at (Young & Associates, Inc.) and (Y&A Credit Services). Or contact us directly by emailing Jerry Sutherin, President & CEO, at [email protected] or calling him directly at 330.422.3474

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