How Banks Can Transform Balance Sheet Planning for Competitive Advantage 

Traditional approaches to balance sheet planning are often mired in siloed operations and reactive measures. The time for a fundamental re-evaluation of your balance sheet planning process is now. 

For too long, the pursuit of enhancing earnings while managing credit, capital, interest, and liquidity risks has been a high-wire act, often addressed in isolation. To make matters worse, the aftermath of the 2023 banking crisis saw many institutions preoccupied with remediating Matters Requiring Attention (MRAs) within individual treasury risk stripes, further entrenching this fragmented approach.

Additionally, the 2023 regional banking crisis and the 2024 collapse of Synapse Financial Technology prompted greater scrutiny from regulators in the areas of KYC/AML and financial risk management. The current regulatory environment, far from inviting complacency, presents a unique chance to adopt a truly holistic approach to balance sheet planning. 

Forces at Play: What’s Driving This Imperative? 

Several powerful drivers are promoting this shift: 

• Changing regulatory outlook: While the immediate post-crisis focus was on addressing specific regulatory gaps, the current environment allows for a more strategic, integrated view of risk management. Given the rapid increase in rates in 2022 and 2023, coupled with changing capital rules (i.e., Basel endgame), banks are identifying ways to proactively integrate balance sheet planning to maximize earnings while robustly managing all financial risks in concert. 

• Rise of new entrants and channels: 
  • Private credit: This is a double-edged sword. While private credit offers avenues for earnings diversification with limited impact to bank capital ratios, the growing off-balance sheet exposure introduces new liquidity risks and an elevated need for sophisticated collateral management. Planning processes must be equipped to fully understand and model implications of on- and off-balance sheet exposure.
  • Fintech charters: As regulators champion a competitive banking environment, technology organizations that once served as partners in balance sheet growth are now applying for their own charters. This signals a fundamental shift in the competitive landscape, demanding that financial institutions be more innovative in their business models and agile in their planning processes to continue to drive shareholder value. 

• Threat of disintermediation: The emergence of stablecoins, despite ongoing regulatory uncertainties, demands immediate attention. Financial institutions must proactively model various scenarios and assess the potential impact on their balance sheets and earnings. Some questions to consider include:  
  • What if your bank acts solely as a custodian for stablecoins? 
  • What if stablecoins appear on your balance sheet? 
  • What if both scenarios unfold? Crucially, what is the impact on liquidity, capital, and interest rate risk under each scenario, and how does your cost model adapt? Ignoring these questions is no longer an option. 

Key Focus Areas for Integrated Balance Sheet Planning 

Banks must prioritize the following to truly integrate balance sheet planning with the rest of the functional areas across finance, including the various risk stripes: 

1. Rethink the planning process: 
   • Break down silos: The legacy siloed approach across different Asset Liability Management (ALM) and risk disciplines must be dismantled. A truly integrated planning process fosters collaboration and a comprehensive understanding of risk and opportunity. This includes reducing the number of offline models in use from disparate data sources and re-committing to fully leveraging the capabilities of existing platforms. 
   • Embed cash flow-based planning: To genuinely pursue balance sheet optimization, move beyond traditional accounting-based planning. Embrace detailed cash flow-based planning to gain granular insights into funding strategy, liquidity risk management, interest rate sensitivity, and capital utilization.
   • Integrate next-generation performance management: Implement methodologies that support advanced performance management and enable timely, sophisticated analytics. This means moving beyond basic reporting and fire drills to predictive modeling and scenario analysis that takes hours instead of days. 

2. Data strategy and governance:  
   • The adage “garbage in, garbage out” remains profoundly true. As the use cases for AI become more advanced and discussions around governance frameworks intensify, the need for clean, structured, and well-governed data is paramount. Without it, even the most sophisticated models will yield unreliable results. 

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3. Optimize your technology stack:  
   • Bridging ALM and CPM: Integrated balance sheet planning starts with clear objectives and constraints that dictate reporting needs. The ALM modeling process plays a critical role, but the question is how it integrates with your broader corporate performance management (CPM) framework. Consider these approaches: 

Technology Stack Options 

Noted below are organizations’ approaches to integrated balance sheet planning and how they incorporate components such as pricing, credit loss modeling, and capital and liquidity planning. Each is unique to company ‘DNA.’

ALM-Heavy Process

• Illustrative example: In this model, cash flows for both existing and new business are primarily generated via ALM systems. Funds Transfer Pricing (FTP) rates are also derived from the ALM system. Driver-based models within a CPM tool like OneStream handle non-interest income and expense, with multi-dimensional reporting (cost center, legal entity, department, etc.) also managed within the CPM. 

• Observed benefits: This approach provides a single source for all forecasted cash flows and FTP assignments. It also fosters better alignment between treasury and interest rate risk (IRR) modeling and the application of behavioral assumptions on products. 

• Observed drawbacks: A significant downside is the elongated timeline, as planning and forecasting are heavily reliant on treasury/ALM subject matter experts to generate cash flows. Data management and governance can become more involved due to multiple hierarchies and assumption sets across different solutions, potentially leading to a cumbersome “back and forth” management process. 

Hybrid Approach (ALM/CPM Tool)

• Illustrative example: By no means a linear process, this approach strikes a balance between ALM and a CPM tool. Conceptually, cash flows for the current book are generated via ALM, while cash flows for new business are generated within the CPM tool. FTP rates still come from the ALM system, but allocation methodologies are modeled in the CPM. Consolidations and multi-dimensional production are also handled by the CPM tool.  

• Observed benefits: This hybrid model gives FP&A/planning teams greater flexibility with cash flows from new originations. It reduces reliance on treasury/ALM SMEs for forward-looking views and enables better strategic planning through well-defined workflows within the CPM. FP&A gains a clearer “line of sight” into financials ahead of the close, with cleaner alignment and linkage between driver-based models and balance sheet planning. 

• Observed drawbacks: Building cash flows for new business in a CPM tool can be complex and lengthy, depending on the scope of products and assumptions. The reporting process can be more involved due to the need to merge existing and new cash flows. Crucially, this approach does not eliminate the need for a dedicated ALM tool to measure and monitor interest rate risk. 

CPM-Heavy Process 

• Illustrative example: In this model, cash flows for both existing and new business are exclusively driven from the CPM tool. FTP rates are still sourced from the ALM system, but allocation methodologies, consolidations, and multi-dimensional reporting are all managed within the CPM. 

• Observed benefits: This approach offers the least reliance on treasury/ALM SMEs for forward-looking views, simplifying coordination. 

• Observed drawbacks: Similar to the hybrid approach, building comprehensive cash flows directly within the CPM can be complex and time-consuming depending on the breadth of products and assumptions. It also doesn’t replace the fundamental need for an ALM tool for granular interest rate risk measurement and monitoring. Furthermore, it requires strong coordination and alignment between IRR and planning assumptions. 

The sweet spot often lies in a hybrid approach, leveraging the strengths of both ALM systems for granular risk modeling and CPM tools for comprehensive financial planning, forecasting, and multi-dimensional analysis. This minimizes reliance on siloed expertise and streamlines the planning cycle, offering greater flexibility and line of sight into financial performance. 

The Path Forward 

The future of financial services demands a proactive, integrated, and data-driven approach to balance sheet planning. Banks that embrace this transformation will unlock new opportunities for growth, efficiency, and sustained profitability. The time to rethink your balance sheet planning process is now. 

To get started, contact CrossCountry Consulting.