White Paper on How to ‘Boost Performance and Reduce Overall Risk with Liability-Driven Investing’
MUSKEGO, Wis.–A new white paper on how to “Boost Performance and Reduce Overall Risk with Liability-Driven Investing” has been published by QuantiPhi.
QuantiPhi is a CUSO created by Corporate Central Credit Union here to meet what it said is the growing need for balance sheet optimization services.
Authored by Ben Wierzba, a financial strategist with Corporate Central, the white paper notes that “interest rate risk has become a main concern of examiners everywhere.”
“But when investment managers discuss the investment portfolio, conversations often revolve around risk and return as they relate to the portfolio only,” the white paper states. “While return and risk of the investment portfolio are certainly important, they should not be the only driving forces behind a credit union’s investing strategy, nor should the investment portfolio be an entity that operates independently from other balance sheet components.”
The paper cites a statement from the BAI Foundation that a financial institution’s objectives in managing securities portfolios should include the following, listed in order of importance:
- To manage overall interest rate risk of the entire balance sheet
- To manage liquidity
- To produce income
- To manage credit risk
“Too often, financial institutions’ portfolios of loans and leases are not very liquid and carry substantial credit risk that can put the entire institution at risk,” the paper states. “Liability-driven investing, however, can remedy that situation. With this practice, risk relative to liabilities is the primary concern. Risk objectives are determined by asset liability management (ALM) strategies that focus on funding liabilities.”
The paper then goes on to provide greater detail and insight into liability-driven investing and how it can benefit a credit union.
For info on the paper, go here.