Operative Planning in a Bank: a Pragmatic Approach

“Planning forward is an exorbitant luxury in modern volatile markets” — says Sergey Savitsky, junior partner at МcKinsey & Company. In his article in Vedomosti, Russian franchisee of The Financial Times, he agitates to move from “labourous but occasional effort” to “a constant process of high adaptability to a changing market situation”.

However, such motivation is questionable. Any participant of any market from a bazaar greengrocer to a fintech start-upper defines his market as “volatile, due to its changing market situation”. Despite conservative banking is not an exception, this can not be regarded as a reason for planning more frequently than once in a year.

How to react proactively to the emerging risks? How to find sufficient sources for loan operations? How to prevent excess funding with more stable yet expensive deposits? How to create an efficient system of the asset-liability management?

The answer for these questions is Operative planning.

“Just in Time” in a Commercial Bank

Bank’s balance sheet structure is restricted with a number of regulatory ratios and limitations at any moment of time. Capital adequacy binds the volume of risk the Bank carries, liquidity coverage ratio regulates the residual term combination of the balance sheet and its product composition (for example, current accounts are included in LCR differently depending on the client).

Natural balance sheet maturing due to contract or behavioural maturing of the financial instruments may lead to regulatory violations in future, even if the Bank continues to perform as usual. These possible violations can be foreseen although they depend on the current macroeconomic situation. The aim of the Operative plan is to prevent the situations when, for instance, predictable credit allowances growth knocks out the capital adequacy. The Bank should either limit its lending appetite or raise additional economic capital, but it has to be done in advance.

Investment lending of big volumes requires to raise funds in advance. This is relevant both for large banks participating in whole-economy projects and for smaller regional banks, and it is hard to say, which banks in this case require it more.

Raising funds in some currencies does not involve getting income from investments. For example, demand for loans in euro in non-euro economies is quite moderate. Investment planning for euro in advance could correct raising euro funds and help to prevent losses from negative interest rates at nostro accounts.

Overall, all the funding sources (money, economic capital, etc) and bank’s needs should be balanced. The lack of stable funding increases the level of risks, while the excess funding deteriorates the bank’s profitability. The practice of banking crises (for example, Russian crisis of 2014/2015) illustrates that all the banks, which implemented the Operative plan as a management tool did not have any problems with liquidity.

Planning in the Bank

Almost all the banks develop their financial plans annually. This type of plans is focused on the financial result (annual profit or other indicators of financial efficiency) and budgeting of expenditures. Regarding the balance sheet, this plan incorporates average volumes for some prolonged time periods. In fact, the balance sheet figures may differ from planned ones. The example is a bank, accumulating funding for a large lending deal, which is included in the plan, but not implemented yet. The other example is the consequences of excess unstable funding which can not be foreseen in a one-year time horizon.

One year time horizon is an effect of focusing on the financial result. But it makes this plan impossible to apply for balance sheet management. In fact, the plan acting in November is accepted by the Management Board in November of the previous year. Moreover, this plan is based on the data of August of the previous year. In other words, this plan is obsolete for almost a year and a half.

The Bank needs a shorter-horizon management tool for efficient management. The most important management tool of this type is Operative plan. Time horizons in management are defined by the turnover rates of banking portfolios. The data shows that the effects of management decisions on corporate lending or retail deposit portfolios become visible a quarter later. Loan preparation durability takes a quarter as well.

Operative plan is being focused on the balance sheet structure, where seasonality and macroeconomic situation should be taken into account on the point-in-time principles. Pragmatism claims creating the Operative plan for the time horizon of one quarter, but reviewing it on a monthly basis. In this case, Operative plan becomes the most efficient tool for balance sheet management.

How to Build an Operative Plan

Procedures of the Operative planning should take into account the bank: profit centre structure specifics as well as the need of observing all the regulatory or internally set ratios and limitations. The implementation of this process is a complicated project in the Bank. It should be realised on the basis of comprehension of all asset-liability management tools. External consultants involved into this project must have ALM expertise.

A short article allows only to enlist some principles for Operative planning.

1.   Balance sheet for the planning needs should be split into two parts. The major attention should be paid to the balance sheet representing the principal business of the Bank. Unstable parts of customers’ accounts, non-core short-term deposits, possible excess funding constitute unstable balance sheets. These balance sheets may differ in the rate of instability and management methods.

2.   Portfolios used to regulate the balance sheets should be considered separately. The examples of such portfolios in large banks include corporate deposits for the term up to 1 week. The smaller banks regulate their balance sheets by direct REPOs or investments in high quality liquid assets. The core for balancing the bank is the rules of forming these portfolios.

3.   Some product volumes (eg, corporate lending volumes) are determined by business units. The plan for other products is a result of operative planning process and is prescribed to responsible business units (for example, plan for corporate deposit portfolio). Some business unit plans are formulated in terms of new deals, the other are set in terms of balance sheet amounts and perhaps their structure (for instance, residual term structure).

4.   ALM IT-system is a high technological infrastructure for the operative planning. This system should be filled with models. The models allow to forecast balance sheet and its characteristics (for instance, the values of regulatory obligatory ratios, limit use, etc) for any date in future during the planning horizon. This is a representation of a dynamic gap technology. The models help to determine the amounts and characteristics of core and non-core deposits, classify them to the stability échelons. These models increase profitability of the bank, they make possible using non-core deposits in funding. Models are required to check the achievability of plans prescribed to or accepted by business units. The important group of the models is the models which allow to link new operation volumes with corresponding balance sheet amounts in dynamics.

5.   However, asset-liability manager should not model the items he or she can put forward as a directive. Business activity is not an object for modeling, it is an object for management.

6.   ALM IT system is dead without the models developed inside the Bank. The models built in industrial well-developed ALM IT systems are usually hardly applicable to the realities both of emerging and developed markets. These models do not take into account ALM process specifics of the Bank. That is why ALM IT system vendors provide interfaces for incorporation into the system of the models developed inside the Bank.

7.   Operative planning for the next 3 months, financial planning for the next year, strategic planning for the 3-5 year horizon should not be mixed. These management tools solve different tasks. These tasks are characterised by different requirements in precision, essence of business solutions and methods for implementation. Certainly, these plans should be coordinated, but the attempt to combine them in a single platform will definitely fail. This unfocused platform will be too hard to support. There is no universal remedy. Only poison can be universal.

8.   Operative plan should be accepted by Asset-Liability Committee (ALCO) or Management Board of the Bank. It is to be accomplished, it is not a recommendation. Funding procedures and internal fund transfer pricing should be coordinated with the principles of operative planning.


... the actionable Operative plan facilitates:

•     to increase efficiency of the bank by funding sources optimisation and growth in stability of the net interest income; the economic effect may be measured as 20-50bp growth in net interest margin and 3—6% p. a. growth of shareholders’ return, including growth as a result of the decrease in risk level;

•     to decrease the risk level, especially liquidity risk;

•     to build an effective system for interest rate risk management;

•     to boost Bank’s incomes by using unstable parts of non-core deposits as funding sources and building the system of management for these financial instruments.

Russian version of this article is here.

Originally published at

To read for more insights:

Floating Rate Loans: Do Banks and Their Customers Really Need Them?

Retail Lending and Risk Appetite Statement: manage risks but not measure them, add value but not impose additional costs

IFRS 9. Credit Risk Valuation Now Matters

How Is Your Bank Prepared for IFRS 9 Implementation?

Comments: 0
Опубликовано 01 May 2017 Author Magister ludi

Имя: Remember me
E-mail: (optional)
Смайлы:smile wink wassat tongue laughing sad angry crying 
CAPTCHA, click to refresh