By Fred Johnson
On July 28, Harvard Business School Professor Peter Tufano faced, in his words, “a daunting challenge” as he looked at his after-lunch subject, “Asset Liability Management” to be presented at the Advanced Leadership Institute. He knew that his “warm-up act” was the animated Eric Sasser, who used lots of movie clips and colorful graphics in his presentation. Tufano’s case study, on the other hand, involved a look at Banc One in 1993 as a growing interest rate derivatives portfolio got the attention of John B. McCoy, Banc One’s chairman and CEO.
So how did a creative finance professor respond to an audience of over-stimulated credit union executives and directors? He rose to the challenge by showing an animated look at interest rate curve change (of selected interest rates) against the average curve over the period 1975 through today. Tufano invited the class to shout out where they were in their own lives as he was “reeling in the years.” It was fun to see a group of 54 adults cheering interest rate oscillations.
While Tufano made the topic fun, it was serious fun, as he also showed startling data indicating the next few years of rising rates are replicas of 1993-95, when banks were buying long and selling short, as many credit unions are now.
Though finding business school instructors who understand the nuances of credit union ALM can be challenging at best, observations from at least two attendees show Tufano was on the mark.
Barbara DeBarbieri, chairman of $360 million Proponent Federal Credit Union, Nutley, N.J., for example, described the ALM session as “first rate. The absolute necessity of managing the maturity and repricing intervals of both loans and instruments was clearly shown and the consequences of failure to do so were clearly demonstrated.”
Stan Baron, president/CEO of $178 million Chetco Federal Credit Union, Harbor, Ore., agreed. “Most significant was the realization that the credit union industry has a -36 gap position. Professor Tufano offered several solutions to mitigate the significant interest rate risk contained in the industry’s balance sheet. I came away armed with at least one additional management tool to utilize at my credit union.”
Fred Johnson is president/CEO of CUES.
