Why Bank & Financial Institution Modeling Matters Now More Than Ever

5 min Read

The specifics surrounding financial models typically don’t change much from industry to industry. In most cases, the modeling templates you use for a retail business can easily be reconfigured for the needs of a restaurant.


Why? These businesses sell physical goods or services and receive money in return.


But banks and other financial institutions are different: they generate almost all of their revenue through interest and investments. Essentially, they use money to make money.


This crucial detail completely changes the approach that analysts must take for bank and financial institution modeling.


Here, we’ll discuss the differences between financial institution modeling and conventional modeling, how it affects the modeling process, as well as a new approach that streamlines the way modelers create, analyze, and present these models to stakeholders. 


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How bank and financial institution models differ from other financial models

Although they certainly get revenue from other sources, like asset management and credit card fees, most of the revenue that financial institutions make comes from interest.


How does this work? Let’s say that a customer deposits $2,500 into their checking account. Bank ABC will then pay out 1% interest on that amount. They may then take the money gathered from many customers, and repackage it into a $35,000 loan with a 4% interest fee that they then sell to other companies. 


As you can see in this example, the bank will then make a profit on the 2% difference in interest. 


This fundamental difference, interest as a revenue stream, requires a completely new way of looking at a bank’s revenue and profits—and, oftentimes, a whole new set of financial modeling Excel templates too.


Additionally, because banks and other financial institutions see huge amounts of money pass through their organizations every day, they have strict regulations to abide by. These restrictions don’t just ensure that the money is being used responsibly—they help financial institutions to better manage risk as well.

What this means for bank financial models

Because of these fundamental differences, you can also expect to see marked differences in the way you build financial models for banks and other financial institutions.


For instance, when you create a typical financial model, you would first start by calculating a company’s projected unit sales and prices. However, bank and financial institution models would require you to start with a balance sheet instead. This is because a bank’s projected income and expenses are directly related to their interest rates


This also means that your operating and financing costs are closely intertwined. You can’t have one without the other, because interest and debt are how banks turn a profit. 


In conventional financial models, interest rates and taxes are calculated separately from a business’ operating profits because it allows you to focus exclusively on the performance of the company itself. But in the case of banks and other financial institutions, these details are crucial to determining their profitability.


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Another obstacle facing banking financial modelers

One other huge implication to consider for bank financial models are the regulations that these financial institutions must follow.


Analysts must work within a strict set of parameters, ones that businesses in other sectors don’t have to adhere to. This seriously restricts what financial institutions can do with their money. 


A manufacturing business, for instance, can use its funds however they see fit. If there’s an aspect of their business they want to improve or double down on, they can simply siphon the funds and resources needed to that area of their business. There are no limits to what they can do with their money. 


However, that’s not the case with banks.


The unique regulations that financial institutions must uphold limits the decisions they can make, and accordingly, the rules of their financial models.


For an example of this, look to banking guidelines on withdrawals and deposits. Financial institutions are required to keep a certain amount of capital on hand at all times, in case their customers ever decide to withdraw funds from their accounts all at one time. 


Banks must also report their assets and liabilities to a regulator on a regular basis. In order to send accurate reports on their daily liquidity and solvency ratios, they must keep a close eye on those numbers. 


Analysts must keep these parameters and more in mind as they build the landscape for their financial models. With so many variables to keep track of, even just creating financial models in tools like Excel can quickly become a daunting task in itself. 


Thankfully, recent advances in computer technology reveal that today’s convoluted, inefficient spreadsheet models will become a thing of the past. 

The future of bank and financial institution modeling

Not much has changed with financial modeling over the years. The problems we experience today are pains that modelers and analysts have griped about for decades. These problems compound even further in the finance sector, as bank and financial institution modeling presents its own set of guidelines and restrictions to account for. 


Bank and financial institution models are complex, intricate representations of situations that must take real-world parameters like regulation restrictions into account. With so many moving parts to keep track of, running a financial model on Excel can quickly become a headache to deal with.


But with advanced financial modelling solutions to support you, you can push the boundaries of what you can do with your bank and financial institution models.


What can we expect to see from future advances in financial institution modeling?


For one, you’ll probably see more companies incorporating artificial intelligence and software robotics to develop more accurate financial models in shorter amounts of time. 


Automation will begin to play a key role here as well, allowing modelers to focus more time and effort on the analysis and presentation of their ideas—rather than poring over their spreadsheets to ensure that their complex calculations are accurate.


With advancements like these, the task at hand becomes one of in-depth financial analysis instead of highlighting how good (or bad) you are with spreadsheets. 


By allowing computers to do most of the heavy lifting in your financial models, you can save more time on your end and work directly with stakeholders to play out different scenarios in real-time. 


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Synario: The financial modeling solution for modern analysts

Traditional spreadsheets are unwieldy on their own, and they become even more cumbersome with every additional parameter or scenario you analyze. With Synario, however, you don’t even have to be an expert modeler to take advantage of its technology.


Financial modeling solutions like Synario simplifies things for you. Our program is designed specifically for financial modeling. All you have to do is plug in your data and create rules for your model to follow. 


Our software features patented Multiverse Modeling technology that allows you to run an unlimited number of macro- and micro-scenarios using different types of financial models in real-time.


Change the parameters of your models—or create entirely new ones—quickly and easily, using intuitive tools that require a short learning curve to master. Then toggle from Analytical to Presentation mode for a clear-cut view of each scenario analysis that you present to stakeholders and organizational leaders. 


Synario updates your modeling presentation as you go, so every change you make in Analytical mode immediately updates in Presentation view as well. “Show your work” with the software’s drill-down functionality, which reveals exactly how your model arrived at a specific calculated value.


Our modeling solution allows you to have the conversations that matter during important meetings and to present your findings with clarity and confidence.


Look to our use cases and customer success stories for real-world applications of our software. To learn more about how Synario can help your bank or financial institution, schedule your discovery call today and receive the “Modeling Intelligence for the Modern CFO” e-book for free.