Pub. 13 2018-2019 Issue 2

NEBRASKA BANKERS ASSOCIATION 27 All cash flows, both before and after your selected future date, must be accounted for. These cash flows – and those of any alternatives – must be treated on the same terms in order to adequately make comparisons. In ALM, we are required to evaluate income simulation over a year or two, and EVE based on an instantaneous rate shock. The former ignores later cash flows that are already set, and the latter makes no provision for the passage of time. Did you ever wonder why it is impossible to reconcile these two metrics? The answer is that they have no common denominator. A total return analysis to a future date is one approach to resolving this. 4. Combinations Reveal Potential Opportunity If we make every decision on a stand-alone basis, we are sentencing ourselves tomediocrity. If no line itemon our balance sheet can ever look bad, they’ll never look good, either. Some- times, two risks make a reward. Consider the barbell strategy: in some yield curve environments, a combination of short and long assets will deliver more return together across multiple scenarios thanwill intermediatematurity choices. The challenge is that depending on rate moves, one of these strategy legs – long or short – could wind up looking worse than the intermediate option. Only by understanding that the combination of short and long can still outperform the intermediate in this case could we make a better decision. 5. Appropriate Confidence is Key Inappropriately low confidence leads to inaction and missed opportunity. Inappropriately high confidence can introduce unneeded risk or lead to mediocre, dogma-driven action. Have you ever systematically analyzed your past decision methods to assess the appropriate level of confidence to place in them going forward? They say hindsight is 20/20, but that’s only true if you actually look. 6. ConstraintsMust Be Addressed You have real constraints – and imaginary or outdated constraints – holding you back. Ruthlessly challenge your con- straints and quantify their costs. When it comes to opportuni- ties, start with the unconstrained possibilities, and then only grudgingly accept value-diminishing constraints, nomatter how business as usual they are. 7. Price and Value are Different Things We know this in our personal lives, but we oftenmistake price for value in the finance arena. Market inefficiencies exist, and in All cash flows, both before and after your selected future date, must be accounted for. These cash flows – and those of any alternatives – must be treated on the same terms in order to adequately make comparisons. Less Money — continued on page 28