New A/L strategy: "get those deposits!" The tricky yield curve and rising rates have banks looking at their asset/liability strategies. But some "power tools" aren't being used right--or at all.

When you strip away all the extraneous concerns about structure, branches, ATMs, websites, and staff, a bank is a very simple engine. George Darling, a veteran assetliability management expert, has been preaching so for years.

The key to understanding the banking engine, says Darling, CEO of Darling Consulting Group, Newburyport, Mass., "is to understand that a bank's business is buying and selling money."

Which is why, when asked how banks could best adapt to the rising rate environment and the "bear flattening yield curve," as some call it, his answer didn't involve models, charts, or graphs. His advice came to a single word: Sales.

Sales? That's right, but first it helps to understand the challenge.

Changing focus in changing times

The current rate picture has banks trying many different things to cope with a major shift: some new, some rethought, and some outside the box. How well they all will do is still to be determined, though some experts have concerns.

The long period of low rates put much of the industry into a mindset that required some hurried rethinking when things began to change. The runup in interest rates, and the shape of the yield curve today--short-term interest rates rising in response to Federal Reserve machinations, but long-term rates staying put or even dipping--is challenging.

"We're seeing a nonparallel yield curve and that's bad news for most banks," says Ed Dietzler, first senior vice-president-capital markets at $2.9 billion-assets Yardville (N.J.) National Bank.

Yardville National, fortunately for it, is not among the majority, Dietzler says. For some time, the bank built its ALCO planning around an anticipated 5% upward shift in short-term rates, and it engaged in a "rebalancing of the tires," so to speak, detailed later. The bank went into the recent cycle with a positive gap, so it benefited from the rise in rates in the beginning, says Dietzler. "At this point we are pretty much gap neutral."

Turning the ship

"Yes, you're talking about a quintupling of rates" over a short term, says John P. "Jay" Brew, head of the consulting firm BNK Advisory Group, Bethlehem, Pa. But Brew notes that in spite of the speed of the change in rates and the yield curve, the resulting margin squeeze isn't a new invention.