Asset Liability Management (ALM) is one of the main tasks of banking or investment institutions. The aim is to effectively hold asset and liability portfolios along the time axis and optimize the RORAC = Return/Risk, using various evaluation and strategy approaches. Due to the complexity of sophisticated mathematical models, effective management of finances includes the application of software tools and systems. Our solution in terms of ALM is as follows:
The calculation structure involves separate handling of the asset and the liability side, where interest rates, opportunity rates, conditional margins and corresponding contributions are calculated in two dimensions:
Calculation of FTP results, i.e. structural margins and contributions – for assets, for liabilities as well as for the difference between assets and liabilities – is performed in a next step, where the split between assets and liabilities is based on unit interest rates, for example, on three-month Libor, or some Overnight Treasury rate.
Asset and liability modules use input data from external and internal data bases, user input, downloaded market data and internal calculation results for financial instruments. Input data and results are stored into the database for subsequent reporting. The general scheme of the data flow in ALM follows the main steps of data preparation and processing:
|Fixed||Credits with fixed interest rate||Credit with amortization option|
|Floating||Credits with floating interest rate||Floating certificate of deposit|
|Stochastic||Deposits with future interest rate agreements||
ALM deals with Interest Rate and Capital cash flows and Pay-offs in future periods. Depending on the interest rate type, fixed and float cash flows can be considered. A stochastic component is included in case of options, representing expected cash flows and distributions.
This module provides means to manage the market environment that is used by all modules:
ALM analyses can be performed under scenario and stress test conditions. Market scenarios define supposed changes in market variables, such as interest rates, exchange rates, prices and indexes of market environment.
Liquidity scenarios include the definition of future developments, reinvestments or refinancing strategies that represent expectations of future changes in cash flows, prolongation of instruments and payments, increase/decrease of business volume, expected and unexpected losses at debtor bankrupts, etc. Liquidity scenarios can represent budgets and financing plans. The gap between the current portfolio’s future without scenarios and expectations of the portfolio’s future behavior is represented in the analysis, via synthetic planned positions at assumed future market conditions. Original portfolios are calculated together with synthetic positions. The calculated results are then used to make decisions about future behavior at the present time point.
Every ALM scenario can combine market and liquidity scenarios.
ALM analyses provides means to represent the future cash flow disposition and detects any gaps or investment efficiencies in the presence of different market scenarios. Different future behavioral changes (Growth, Defaults of large customers, deposits increase, etc.) may be activated in cash flow scenarios in order to optimize the asset and liability management.
|Supporting Modules:||Definition of opportunity rates, Interest rate expressions, Market and liquidity scenarios, Analysis by periods and time schemes, Static and dynamic portfolio structures and sub-portfolios|
The models of our risk management system can easily be customized and its functionality is enhanced in a flexible way, by adding new model scripts. Its implementation is based on a well-known artificial intelligence tool - the expert system shell with inference engine. Scripts are used to model the Windows GUI, using model variables to define the business logic, expressed in rules. Models are interpreted by the expert system and the inference engine runs rules on model variables. Changes in models are handled online, which means that the changes are activated immediately after editing and reloading the model. Additional modules are currently being added:
The ALM module inherits the features of Risk Framework Interfaces and Connectors, including: