It might come as a surprise that most banks don’t have a balance sheet strategy. Why? Over the past 15 years, they have focused on selling loans, collecting fees and declaring victory – without a true balance sheet strategy.
Even financial institutions with a strategy often find that their Asset Liabilities Committee (ALCO) prioritizes interest rate risks over broader strategic goals. With shifting interest rates and fluid market conditions, all banks – regardless of whether they have an existing strategy or not – need to reevaluate their approach and recognize the importance of a well-defined balance sheet strategy.
7 key questions for developing a balance sheet strategy
Creating a balance sheet strategy starts with a bank asking themselves these seven questions:
- What do you want your balance sheet to look like in two years?
- Are you a relationship or transactional bank?
- Do you originate/renew loans without a primary operating relationship?
- What is your target loan/deposit product mix in two years?
- What is your current revenue/profitability and Return on Capital by line of business? What do you want it to be in two years?
- What is your target mix of interest rate risk/market risk/credit risk?
- Are you maximizing Customer Lifetime Value (CLTV)?
Answering these questions helps banks identify their target clients, determine pricing strategies and decide whether they want to be relational or transactional in nature. Without this clarity, banks risk operating blindly, taking on deals that may not fit their long-term objectives.
For example, a bank might ask whether it should originate or renew loans without a primary operating account. The answer isn’t just a simple ‘yes’ or ‘no.’ It depends on what kind of loan-to-deposit mix they want in two years, who is using their liquidity and capital, and whether they are getting paid appropriately for it.
By asking these questions upfront, banks can shift from reacting to opportunities as they come to proactively shaping a balance sheet that drives success.
The role of pricing
Once a bank understands its balance sheet strategy, the next step is execution, and that begins with pricing. Banks need to develop a relationship-based pricing model that goes beyond individual transactions, focusing on relationships and profitability. This requires a shift in mindset: pricing should be a defined, intelligent and empowered process.
Banks should incorporate risk ratings, internal and external market intelligence, and specific tactics to support their balance sheet strategies. From there, they should measure, inspect and coach pricing behaviors while aligning incentives with shareholder value. These steps help ensure that pricing decisions support long-term strategic objectives.
The right pricing strategy depends on the bank’s goals and direction. For example, a bank with an overconcentration of energy loans in Houston must decide whether the credit risks justify the margin. Some might think the risks are worth it, while others require higher margins to compensate. Similarly, banks looking for the highest price must also consider risk, capital, and concentration. Sometimes, the best answer isn’t the highest price – it’s the optimal price after adjusting for risk and capital.
Making balance sheet strategy a priority
Having a balance sheet strategy should be a top priority for all banks. ALCO should own this strategy, monitor it consistently and do a full update annually as part of the budget process. While the strategy may evolve based on economic conditions, it should always serve as a long-term roadmap. For example, after the recent election, some banks revisited their strategy in response to changes in interest rates.
The key is to plan at least two years ahead while remaining adaptable to market shifts. A well-defined balance sheet strategy allows banks to seize growth opportunities and strengthen their relationships. By asking the right questions to determine their balance sheet strategy – and aligning their pricing strategy accordingly – banks can avoid missed opportunities, optimize profitability and boost their chances for long-term success.
Mac Thompson is the founder and CEO at White Clay.
