by William McGuire, Ph.D.

Quantifying the costs of an asset/liability model is often considered easier than quantifying the benefits because many costs can be directly valued. A full review of the issue, however, will show that many ALM model-related costs are indirect and not so easily valued. A comprehensive evaluation must recognize all cost elements.

The major cost elements of an ALM model are the level of the model (how fundamentally powerful it is); model options specified; installation activities (setting up the model so it technically functions); implementation activities (customizing the model to match your institution); behavior assumption service fees (e.g., for prepayment and core deposit inputs); one-time investments to integrate the model into your ALM process solution, ongoing user-related costs (time running the model, training, etc.); and annual maintenance fees.

As a rule, the costs of obtaining and having an ALM model normally increase quickly as more powerful (and more complex) models are specified. This increase especially relates to initial outlay and model installation/implementation costs. Once a model is implemented, ongoing costs rise more linearly with the ALM model level.

Multiple factors define expected ALM model all-in costs. Consider each in turn.

Initial outlay is a significant part of the total. The initial outlay includes the cost of searching for the right ALM model, initial purchase (or upgrade) price, expenses for any specialized supporting software or hardware and user training time. Purchase price varies with the model level chosen or the degree of upgrade obtained. Model options and add-on services add to this total.

Supporting software or hardware costs are often an important consideration, particularly for high-powered/complex ALM models. Be sure to inquire about these needs when purchasing or upgrading a model. Networked versions of an ALM model often require their own servers and installation-related items. If your institution is running on a virtual server (or planning to), be sure the model is compatible with that environment. – See more at: http://www.cumanagement.org/article/view/id/CFO-focus-ALM-model-price-tag#sthash.sU3MC8DR.dpuf

continue reading »