ALM Modeling: Outsourced or In House?


One of the core asset liability management questions that a community bank must answer is whether they should run a model in house or outsource the modeling and reporting process.  Both methods have pros and cons.  Generally, the discussion includes these items as the keys points:

In House Model Benefits

  • Timely report runs with turnaround dictated by the bank instead of a vendor
  • A more thorough understanding of the model inputs, especially the assumptions being used
  • The ability to do numerous "what-if" scenarios to quantify decision making
  • The ability to do more customization to the model and the reports

Outsourced Model Benefits

  • Better controls over the modeling process
  • Better technical expertise in running the model
  • Less man hours dedicated to maintaining and validating the model
  • More trusted by examiners
  • Less reliant on one key employee (especially important in smaller banks)
  • Better documented assumptions and inputs

We have made changes and additions to the BancPath model over the last several years in order to get our clients the best of both worlds (as have some other vendors).  These include more places for customization, the use of a "What-If Module" that allows users to test various strategies and see the impact on both earnings and risk, and clear documentation of inputs and assumptions.  However, we also respect that many banks are very happy with their internal models.  In fact, we are now offering services to these banks where we help them develop well documented and statistically significant assumptions based on their data that can be plugged into their in house model. 

But, we also run into banks where they are reluctant to consider an outsourced solution because running the model is a full time job for someone.  I thought about this when I saw this terrific Siri inspired Dilbert:


So, the question is, are we making the decision not to outsource because it is the right decision, or because it is the path of least resistance? As an organization (especially a small one), are we better off using our time generating the results or interpreting and managing based on those results?  Maybe that employee's time could be better used on sifting through the other mountains of data in the bank instead of wrestling with an ALM model.  In today's constantly changing world, we need to be constantly evaluating where we can get the best return on both our dollars and our time.  Let us know if we can help.