Bank Directors Seminar, Coeur d'Alene, ID, September 15-17, 2019
Ten Investment Portfolio "Swing Thoughts" for
Today's Low Rate Environment
1 Maintain sufficient on-hand liquidity, BUT stay fully invested, AND...
2 Remain patient and disciplined, keeping in mind the three purposes of the investment portfolio:
• Serve as a tool to help manage the bank's liquidity needs NServe as a tool to help manage the bank's interest rate risk s Provide yield/earnings
3 Manage the portfolio in the context of your balance sheet trends, loan growth and liquidity/interest rate risk management needs. Develop processes and ALCO/Board reports that are appropriate for the size and complexity of the portfolio.
4 Remain defensive to rising rates — establish risk limits for how much portfolio market value and capital you're willing to risk if rates rise. Assess risk/reward of volatile bonds.
5 Focus on understanding cash flows and cash flow volatility as rates change.
6 Diversify -- across/within sectors and over a span of time. This is doubly critical in the municipal bond and mortgage securities sectors.
7 If you want to take additional duration/price risk, establish clear, measurable risk limits (using stressed effective duration, effective convexity and price depreciation exposure) and consider using tax exempt munis (which have only 2/3 the price depreciation exposure of taxable bonds with the same maturity). Run simulations before making sizeable changes in the portfolio.
8 Actively manage municipal credit risk using a municipal bond watch list
9 Use the portfolio as a tool to help manage the bank's tax position (the level of tax exempt income, timing of loss/gain recognition).
10 Prepare a written quarterly strategy. Remember, we want to build a portfolio (don't be "sold a portfolio") comprised of securities that:
• Trade efficiently in broad and active markets a Have predictable cash flows • Can be pledged to secure borrowings with reliable counterparties
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