Pub. 9 2019 Issue 4

19 ISSUE 4. 2019 B A N K E R S ’ B A N K • O F T H E W E S T • 800-873-4733 | www.bbwest.com Our mission: TO CHAMPION COMMUNITY BANKING PATTY PINSON Operational Services ppinson@bbwest.com PAUL HARRISON Lending Services pharrison@bbwest.com IN BUSINESS TO FURTHER YOUR BUSINESS • Loan participations and bank stock loans • ATM/debit and merchant processing programs • Operations • Cash management • Safekeeping and predictable cash flow, as well as securities that are readily sold in the secondary market, is critical. The risk/reward relationship for securities should be viewed with an eye toward liquidity risk. When purchasing a bond or considering alternatives, portfolio managers should take a hard look at the cash flow uncertainty or optionality as well as the underlying price sensitivity. Scenario Cash Flow Analysis: From a liquidity management standpoint, the ability to monitor the scenario dynamics of investment cash flows is extremely important. Projected cash flows under the existing rate environment are a necessary starting point, but must be supplemented by additional projections for different rate scenarios. We know portfolios that contain callable bonds and/or MBS will experience faster cash flows when rates fall, and slower cash flows when rates rise. This asymmetry of cash flows and the degree to which those cash flows are uncertain needs to be calculated and reflected in an analytic reporting model. Liquidity risk management is obviously important in today’s environment from both a regulatory standpoint and from the perspective of prudent bank management. Having the right processes, tools, and management practices in place will help the bank main- tain healthy performance and an optimal risk/reward profile. w Jeffrey F. Caughron is a Managing Director with The Baker Group, where he serves as President and Chief Executive Officer. Caughron has worked in financial markets and the securities industry since 1985, always with an emphasis on banking, investments, and interest rate risk management. Contact him at: 800-937-2257 or jcaughron@GoBaker.com .