ZM Financial Systems, headquartered in Cary N.C., is an ALM/ALCO software developer and supplier to the financial industry. They are practitioners in this industry and subject matter experts of the highest order. ZMFS hosted its 15th anniversary with a client education conference in Las Vegas between October 23 – 26, 2018. This event is reserved and restricted to ZMFS’s clients and intimate partner firms.
In this article:
One of my favorite lyrics (no doubt taken from Stoic philosophy) is from Kansas’s “Carry on my Wayward Son “: If I claim to be a wise man, it surely means that I don’t know. It’s simple. Realize humility, remain open to learning, accept change as an absolute constant.
Over the past 20 years, I have attended between 10-15 educational events annually. ZMFS’s user conference was different. The speakers, consisting of ZMFS’ executives, subject matter experts, partner firm experts, and client attendees were of the humblest, wisest collection of people I have had the pleasure of meeting and learning from. They are representative of the lyric and its meaning.
No one is right. The best we can do is minimize to what extent we are not right. Insulted? Don’t be. No one can predict tomorrow or any time sequence of days that come after today. No one even knows how today will pan out in the end until it is officially over at 11:59.59 pm.
Why does any of this matter? It matters because it encapsulates the importance of understanding, or at least the willingness to understand or accept, the chaos of the banking and financial industry. It is influenced by internal corporate as well as external variables. It is also a fact that each of these variables impacts each other one way or another. Complexity, I have been told, is the enemy. Distorting reality and impacting each of us in ways we would change if we could. Unfortunately, that is rarely the way it works. Let me share with you some of the informational highlights of the event and you be the judge of these correlations.
ZM Financial Systems/System Updates/Roundtables/Risk
ZM’s objectives and goals are simple. Build one system. Utilization of a single platform containing multiple components covering all specific ALM needs. Supply, maintain and enhance defendable analytics that client subscribers can be confident in their integrity. Central to this objective is the practice of doing anything within their power to increase the efficiency of their systems and reduce error. No one has it all. The goal of continually striving to have it all is what is most important. ZM supported this vision at the event through a series of lectures and discussions. They outlined production updates, new releases, and enhancements to their existing platform. This includes the current and forward-looking development of ZMdesk, the firm’s flagship analytics platform, as well as a host of SaaS offerings based around ZMdesk. The importance of customer support and service through expansions of their technical support teams both in-house and in-field support was highlighted through the conference. ZM encourages their clients to lean on them for support and help make their jobs less stressful and enjoyable. (It takes special people to be ALM experts).
Roundtable topics, intertwined with open group discussions, educated all bank attendees and participants on the most relevant and pressing issues the industry faces. Each roundtable consisted of diverse bank member clients accompanied by a ZMFS subject matter expert. Each group was asked to discuss and formulate a short list of team observations and present them to the entire conference. Topics vetted included:
ZM/ALM/Markets/Market Topics for Bank Clients
ALM gets complex. This is what happens when the human species evolved from barter to cash to the establishment of financial institutions. There are many loans and many mismatches. ALM developed when the need arose to understand the complexity of mismatches. During the past 10 years, some conclude that banks have not become more efficient, bank costs are up, bank efficiency is down.
The number of acronyms that participants toss around is staggering, scary and convoluted (Bloomberg pneumonic speak?). Unlike Bloomberg mnemonics which do have defined meanings, the meanings and definitions of terms such as ALM (Asset-Liability Management), ALCO (Asset-Liability Management Committee), ERM (Enterprise Risk Management – possibly the most misinterpreted acronym in vogue) and countless others lack standard definitions and are frequently misused and misunderstood. Examples are ALM and IRR (interest rate risk). Are they synonymous or is that too simple? ALCO, Compliance, Operational Risk (confused with ERM – Enterprise Risk Management)
Risk is complex and extremely challenging, especially for financial institutions that are aggressively growing. Expansion requires adding credit and interest rate risk, and growth can change regulatory status and compliance requirements. Institutions are not taking risks into account at the correct time and in the correct way. (Watch the ego, if you think you are doing everything right, why worry?) A problem many would not care to address or admit is that too many people are looking at things through rose-colored glasses. By definition this is overly optimistic, see things in a positive light, a rosy retrospection with a tendency to view past events in a positive and often unrealistic light.
People, personalities and egos (another way to look at this: Fiefdoms, Silos, Inefficiency) clogging up progress and best practices that would better them, their co-workers and the institution are a risk reality. Sooner rather than later this must be confronted. At every event, from participants across the industry, this is considered the biggest risk. Cultural inability to properly document, manage and report risk (ALM is a component of operational risk).
MRM – Model Risk Management / Documentation/ Data
A simple way to look at the world and work we do is this: every analytic (software, code, testing) is a model. Every model requires fuel (in our world, data). The output of models processing data are reports, information that institutions and their executives rely on to make strategic decisions that have far-reaching impacts.
Models are engines, data fuels these engines. ZM is an ALM engine, data fuel comes from 3rd parties such as Bloomberg, Reuters, ALM-specific data providers, loan and deposit terms and conditions. (See ZM goal and Objective page 2.)
Generally, the complexity of numerous systems coupled with the quantity and quality of data arguably leads to a low probability that what is being reported makes sense. First line documentation and reporting is too hard to read and understand. This is frequently talked about, it is arguably the truth. Discussion at the conference aimed specifically at addressing these problems.
Documentation:
For years I have been listening to risk, data, model, regulatory and lord knows how many others on the significance and importance of documentation. I have been writing about it for the past six years. (If it ain’t documented, it never happened). I am still hearing it today. The necessity of proper documentation and continued, ongoing documentation is not only essential but the difference between success and failure, doing the job right or doing it half-baked. Let’s discuss what was talked about in Vegas (I know what happens in Vegas is supposed to stay there…though this is important!).
Documentation, it is proof, it is the facts about your story. It is your proof internally when reporting up. It is your institution’s proof externally that tells observers (shareholders, clients, regulators) what you are doing, why you are doing it and does it make sense. Can you defend what you are doing and back it up? (if it ain’t documented, it never happened). If you are a manager, an executive, a board member, it is suggested that you encourage and direct this activity internally and support the people that have the job of doing it. It is good honest work. If you are a specialist or one that is doing the documenting keep in mind that what you are doing is convincing management, clients, shareholders, regulators that what you are doing impacts the bottom line (it is paramount important) so therefore…
Logs of Documentation. An example of a documentation log goes like this:
The best discussion anyone can have is supporting what they have done and why they have done it. Better data, models and analytical systems support explanations.
Remember when you were of school age? The teacher, parent or authority confronted you about an issue. The best discussion you could have had is, know where you were, what the facts are and hope your explanation is accepted or believable. Which brings us to MRM and MRAs. MRAs to banks and credit unions overwhelmingly result from undocumented processes. MRAs related to Model Risk Management:
Sounds like a mess. It is – with a simple solution: Document! Keep good past, present, forward looking processes current and well-documented. Develop or enhance the banks formalized process to evaluate. (Disclosure: We know how to do this). Document all governance.
A wise presenter in Vegas discussed the matter of model risk management, model assumptions, its corresponding data and documentation requirements. Think about it. The importance of this cannot be overstated and the solution (though seemingly time consuming and tedious, like writing this article) is worth it! Necessary, and yes, required. Document your process, your model generation, assumptions for your model or models, data required to test those assumptions, test the model results. MRM will continue to evolve, firms must be adaptable.
Analogy: look at the work as a soccer team, everyone is on the team, the team should not be contentious. The objective is to get the ball in the goal and keep the ball from going into yours. Your best effort is all you can do. Monetize the hard work that you are doing. As a front line worker or an executive, seek strategic benefits.
Markets/Factors Influencing Bank Industry – What’s Happening Out There?
We are late, long in the tooth of an economic cycle. Federal deficits, large stimulus pumping the economy while the economy is booming. More supply could steepen the curve. Rates rising steadily in the U.S., so far without disruption. The European Central Bank is reducing its bond purchases and may hike rates in 2019. SOFR will most likely be replacing LIBOR. Volatility is increasing and will continue to do so both for realized and implied vols. Trade policies, geopolitical instability… the list goes on and most participants get the point. Market conditions for banks and credit unions continuously require preparation and change. Conference experts gave detailed presentations and had discussions regarding them. Some say Money Markets may be a thing of the past, as today more non-maturing deposits are in checking accounts than money markets. However, consumers are beginning to look for yield in their deposit accounts. Both banks and credit unions are losing market share to other institutions that are making loans. Consolidation is accelerating, competition for deposits is everywhere. One can never account for everything but again, our goal is not to be perfect (unattainable), rather do the best we can, which includes change and adaptation when becoming aware.
CECL – Let’s Get to the Heart of It
FASB did not intend for CECL to be incredibly hard. The entire point of CECL is the correct calculation of allowance (your best rainy day estimates and cash so the institution does not drown and die). We live in a complex, overstimulated, integrated and changing world. So, let’s keep this simple. CECL has six-to-10 methodologies institutions can choose. These methodologies vary in complexity. Your institution must choose/determine what methodology it should use. Once that is decided, understanding data requirements can be addressed: which data fields, how much data, where is the data stored? Institutions need 10 years of historical data; however, this is not always possible or practical. If it is not practical for your institution, document why it isn’t practical and support your position with documentation.
Industry chatter about CECL. Institutions and specialists are observing and reporting a lack of process, understanding of process within all institutions. Not all banks and credit unions are on the same page (logically, they differ in size, regulatory oversight, loan book structures). There will be no repeal of CECL (the CECL international standard is in place and is not going backward); therefore, do not wait until the night before the exam to get your work done. Take ownership of the process. Getting this straight, everyone owns this, the questions and answers are outlined.
CECL compliance. As you read earlier, compliance and accountability are confirmed in the disclosure of what, where, when, how and why. Necessary documentation discloses, explains how you came up with your conclusions supported by your tools, assumptions, data, and reporting output. Start with the easier methodologies that are more mature and have the most data.
CECL will be extremely disruptive. It will increase excess capital reserve requirements substantially. Institutions are undercapitalized (support for this was detailed). Incorporation of stress testing in proposed capital buffers. Stress testing is a good best practice, not just for CCAR/DFAST but for everyone. BCBS239 guidance is meant to be used by all businesses as time goes on (it makes sense, believe me!).
Strategic Risk Associates (SRA) and ZM Financial Systems (ZMFS) – Why are we Working Together?
Strategic Risk Associates and ZM Financial Solutions’ business models and company culture have much in common. Correlating to the content above, Strategic Risk Associates’ goal is to provide a single platform, a central system of record of an institutions enterprise risk profile, documentation, ownership, historical trends, executive summary reporting that encapsulates all risk activities. SRA’s ERM Watchtower platform monetizes the collective hard work of individual business units and aligns them with strategic objectives and strategic value.
SRA’s ERM Watchtower Platform is the Normalizer and Aggregator. Resultant data from ZMFS’ analytical systems fuel the Watchtower scoring and reporting for ALM. At present, executive and board reporting is a manual process put together through a combination of complex systems and data. Information is hard to read and understand. SRA has solved these problems.
ERM Watchtower’s central system of record compliments ZMFS’ ALM analytical expertise by bringing data elements critical for the bank to track, trend and report together. It is the final step in the process of documentation, defending the institutions position and validating your story surrounding your best practices.
ZMFS’staff is comprised of a group of top ALM specialists and practitioners. SRA’s staff is comprised of a national leading collection of former bank and regulatory practitioners. Our goals are the same. Be the best, most comprehensive supplier of expertise and analytics in our respective roles. Ease the complexity that at present is stressful, inefficient and untenable in the current and future financial industry.
About the Author: Marc Caccavale has been thoroughly documenting and writing conference summaries for the past six years. He has spent the past two decades meeting with and advising financial industry, government and corporate professionals on the use of analytical system engines, the data necessary for their function and the resultant outputs required by end users. Marc purposefully asked to work with and be a part of Strategic Risk Associates after meeting its founder and CEO at a risk management conference in New York City while writing an article three years ago. The vision and business objectives of both SRA and ZMFS are central to the realities that Marc has been witnessing and researching on the front lines.
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