NextGen ALM and Balance Sheet Management: Technology Trends and Trajectories in Turbulent Times

Globally, the financial environment remains in an ultra-low interest rate environment and there is a high probability that interest rates will remain low (or even negative) for a prolonged period of time, especially from the extreme distress and resulting economic fallout from COVID-19 developments globally. The average net interest margin (NIM) for major banks have already been falling, driven by the lowering of interest rates and flattening of the yield curve among other factors. This is leading to a NIM compression for banks, which could result in negative impact and significant profit reduction in the coming years.

As secular dynamics and market factors reshape bank balance sheets in a low interest rate environment, emerging risks and challenges will need to be carefully managed to navigate reduced (and less stable) funds for lending, counter ALM profit margin compression, and more accurately steer capital and risk optimization decisions.

'Black swan' scenarios such as COVID-19 – where events and economic progressions involve fast moving, fast changing situations – will stretch and exert unprecedented demands on a financial institution’s balance sheet and asset-liability management value chain. This is likely to shape regulator and government thinking around what emerging capabilities banks should possess.

Celent believes that proactive actions based on the best examples of ALM and risk mitigation responses during this crisis will be an indicative direction in terms of future expectations for ALM and balance sheet management groups, functional capabilities, as well as their technology and data underpinnings. Financial institutions and solution providers must watch these developments closely.