access to it elsewhere) is a prudent measure. Of course, the thought of investing in an asset that eﬀectively earns 0 per-cent (or maybe less, if we contemplate the NIRP scenario) is a depressing one; however, a more constructive interpretation of the same situation is that the stingy total return proﬁle of the next-best use of cash (e.g., short-duration money market investments) means that cash can alternatively be viewed as an insurance policy being sold at a bargain basement price. Second, we should all probably spend more time imagining the types of risk to which the balance sheet is exposed, if rates were to drop another 50 or 75 basis points from here. The bond market seems particularly complacent these days about the likelihood of a rate hike in the near term; however, we would caution that the next couple FOMC meetings may be much dicier than expected. When we gaze into our crystal ball, we see a situation where the governors may well have to balance the weight of history (e.g., the checkered history of late cycle rate hikes leading to economic recessions) against the fact that it might just be their last ideal opportunity (e.g., Chairman Yellen has a press conference scheduled following the September meeting) to hike rates before the election really heats up, when the political pressure to stay silent will likely amplify. To the extent that it isn’t already public knowledge by now, bankers should recognize that they no longer have any friends left on the committee, nor do there appear to be any friends of the market at the table. Central bankers may be listening to what community bankers are saying, but their actions imply that they aren’t really hearing what’s being said. Against the context of an industry already facing the nasty trifecta of a challenging and competitive environment for re-sponsible loan growth, a credit cycle that’s looking increasingly long in the tooth, and a frighteningly skinny yield curve, the prospects for bank valuations look somewhat daunting. And so while we prefaced our article with a quote from one of the more prominent architects of the modern Chinese economy, in retro-spect it may have been more appropriate to take our inspiration from someone a little closer to home. Namely, the lyrics of a song by country singer Justin Moore come to mind: “I don’t know how this ends or where this goes, but the only thing I know is: You look like I need a drink right now.” James Rhodes is senior vice president, balance sheet management, Regional and Community Bank Group at the Maxim Group, LLC. Contact him at email@example.com. MANAGING STRATEGIC RISK IN CORE VENDOR RELATIONSHIPS BY TRENT FLEMING T here has been a lot of attention around core system selec-tion, contract negotiation and related matters recently. Just like contingency planning, vendor management is more than a regulatory requirement. It is a prudent business practice. The failure of banks to properly manage their relation-ships with vendors caused banking regulators to impose vendor management guidelines. Poor vendor management costs money, plain and simple, and creates issues of exposure and liability that may be hidden until some sequence of events occurs that brings such liability to the forefront. Essentially, you should organize all of your vendor rela-tionships in such a way that you know who you are doing business with, what the terms of the relationship are (time frames, service levels, bank obligations, vendor obligations) who the proper contacts are (normal involvement, escalated involvement) and have in place a methodology for tracking existing contracts, and getting new contracts into the same organized system so that they are also properly tracked. In many cases, a simple spreadsheet will do, but you will ﬁnd numerous vendors who oﬀer both desktop and web-based NEXT MONTH: Don’t Overlook Branch Technology Budgeting for Performance solutions for managing vendor relationships. Again, this is just common sense. Make sure that someone has central re-sponsibility for vendor management. Focusing on the speciﬁc exposure and liability involved with your large information technology contracts — primarily core processing, item processing, EFT services and perhaps internet banking — when you outsource these services, you will ﬁnd these contracts to be extremely speciﬁc and virtually loaded with pitfalls to navigate during the course of their lifespan. Over the years, these contracts have grown in size and complexity, and I can assure you that the additional language is primarily to protect the vendor’s interests, not yours. Below are several clauses that are most critical, as examples of how serious these matters can be. 1) Natural termination or “deconversion” fees. You will ﬁnd that your IT contracts contain language detailing the vendor’s re-sponsibility when you choose to move to another vendor at the end of the contract. Most read something like this: “We will provide reasonable deconversion assistance at our then current rates.” In practice, I am seeing fees that are the equivalent of an extra six to 12 months of processing fees — all that, for provid-ing one or two sets of “tapes” or ﬁles to your new vendor for the conversion process. Note that the word reasonable, in the sentence above, is not modifying the word cost. When renewing these contracts, or signing new ones, insist on a reasonable ﬁxed fee for the deconversion charges. Move on if a vendor won’t agree to ﬁx these costs. 2) Early termination fees. I don’t ever advise arbitrarily break-ing a contract and attempting to walk away without penalty.