Balance Sheet Agility Will Separate Tomorrow’s Banking Winners

The prolonged uncertainty surrounding interest rates has fundamentally changed how financial institutions should think about balance sheet management.

Rather than attempting to predict the next move in monetary policy, banks should focus on building resilient balance sheets capable of performing under multiple scenarios while embedding interest rate risk into strategic decision-making.

That is the view of Tihomir Bublic, Director of Asset Liability Management at Hrvatska Poštanska Banka, Croatia, who believes institutions must move beyond conventional approaches if they are to remain competitive in an increasingly unpredictable environment.

For Bublic, resilience begins with acknowledging that traditional stress testing is no longer sufficient. Institutions need a far broader understanding of how different interest rate environments could affect both sides of the balance sheet.

"Resilience requires stress-testing across a range of scenarios - not just parallel shifts, but steepeners, flatteners, and inversions," he says.

He believes banks must also avoid becoming overly exposed to long-duration fixed-rate assets unless those positions are appropriately hedged.

At the same time, liability management requires a much deeper understanding of customer behavior than contractual assumptions alone can provide.

"On the liability side, invest in genuinely understanding deposit behaviour rather than relying on contractual repricing dates," Bublic explains.

Many organizations continue to underestimate some of the structural weaknesses embedded within their balance sheets. According to Bublic, these vulnerabilities often stem not from market movements themselves but from unrealistic assumptions used to manage them.

"The most common vulnerabilities arise from overly optimistic deposit beta assumptions, underestimated optionality in assets and liabilities, and a disconnect between the IRRBB framework and actual business strategy," he says.

That strategic alignment becomes particularly important during what many treasury professionals describe as the current "shoulder period" of the interest rate cycle.

With central bank policy becoming increasingly data dependent, institutions face growing pressure to protect margins without exposing themselves to unnecessary interest rate risk.

Rather than attempting to predict a single direction for rates, Bublic believes flexibility should become the overriding objective.

"The key in the shoulder period is disciplined optionality," he says. "Rather than making large directional bets on the rate path, institutions should ladder asset maturities, diversify funding, and preserve flexibility to act as opportunities emerge."

He also argues that existing hedging strategies should not simply roll forward unchanged.

"Deposit pricing strategies deserve critical reassessment, and existing hedge positions should be recalibrated to reflect updated rate expectations rather than rolled over mechanically," Bublic says.

"Agility and scenario preparedness matter more right now than conviction on a single outcome."

Deposits remain one of the most important foundations of banking resilience, but Bublic believes many institutions still focus too heavily on pricing rather than customer relationships.

"Stable deposits come from a value proposition that goes beyond rate," he says.

"Price-sensitive customers attracted solely by rate will leave when a better offer appears - genuine stickiness comes from the quality of the overall relationship: transaction accounts, service breadth, and long-term trust."