Risk often comes in pairs, and right now, interest rate risk (IRR) and liquidity risk are the dynamic duo putting pressure on financial institutions’ balance sheets. In looking at paths to address these risks, the options don’t always look that great. In some cases, they may create other issues with earnings and capital and impinge on the organization’s ability to move forward strategically at the needed pace.
Giving the balance sheet time to heal
An approach to consider is to be patient and let your balance sheet heal. An immediate concern from decision-makers might be that being patient looks an awful lot like doing nothing. They worry that examiners won’t like it. Also, the Board and leaders may not be comfortable being passive and feel an understandable desire to “get ourselves out of this situation quickly.”
But the key is that being patient is not doing nothing; on the contrary it’s an active process that requires analysis and monitoring. Given enough time, many sources of IRR and liquidity risk will resolve themselves, but leaders need to understand whether they have the time. This requires a two-step process that includes effective analysis that illustrates whether giving the balance sheet time to heal is a viable option, and beefed-up monitoring to ensure the healing is on pace as the future unfolds.
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