Financial institutions are in the business of taking calculated risks, but it is the responsibility of the asset/liability committee to measure and manage those risks—and to ensure the institution is compensated for taking them.
Consider the following:
- The Federal Reserve’s Open Market Committee’s tightening strategy has already delivered 3.75% of rate hikes since March (interest rate risk)
- Depositors are in the early stages of using and/or investing funds elsewhere (liquidity risk)
- Indicators abound that recession is already underway (credit risk)
All three of these potential risks have now come into play at a record pace. The implication for institutions? ALCO and board discussions should be changing, strategies adjusting and internal feedback loops shortening up.
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