Your SlideShare is downloading. ×

8. new advanced_alm_2011.10.8

1,511

Published on

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
1,511
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
173
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide
  • Good afternoon, ladies and gentlemen, it ’ s my pleasure to present ALM system at this prestigious Enterprise Risk Management Asia 2005 Conference. My name is Jae In Kim and I am currently working in Korea First Bank as the head of ALM and Integrated Risk Management. I have worked in this position since New Bridge Capital took over Korea First Bank at the end of Dec. 1999 and at KFB since 1975. In January 2005, the UK bank, Standard Chartered, bought KFB from New bridge capital, for USD 33 billion. Standard Chartered will take over management of KFB after the approval of the FSS at the end of March.
  • As you can see this Agenda, we will be covering ten topics.
  • Please refer to this diagram which shows the evolution of ALM in KFB. First, I want to present how KFB ’ s ALM has improved and evolved since its inception. The previous ALM system was established in 1995 as “ in-house development ” . During the first half of the year 2000, we focused on static repricing and maturing gap analysis and fund structure analysis. In August 2000, we made a consulting contract with Arthur Anderson and Sunguard Co. to introduce the Bancward ALM package and we completed the introduction of Phase 1 of ALM system in Jan. 2001. At that point, we could produce static NII & NPV simulation results on the basis of deterministic 200 bps up & down interest rate scenarios. But, in the process of the implementation of phase I during 2001, we realized the limitation of static interest rate scenario analysis, which was not reflecting movements of the reference yield curve by assuming only parallel shifts of the reference yield curve and not covering various sources of interest rate risk defined by Basel Accord such as repricing risk, basis risk, yield curve risk, and optionality risk. So, we made another contract with Arthur Anderson and Sungard to introduce a stochastic interest rate scenario model reflecting both customer behaviors and term structures. Currently, we are utilizing the ALCO package which include NII simulation, Basic Surplus, EVE simulation and BIS model.
  • This slide describes the ALM system architecture. The primary components are insight and convergence at the center of the figure. The insights brings transaction details such as loan and deposit transactions into the convergence application. The inputs to convergence are current positions (from insight) and models such as customer behavior models and term structure models and various scenarios. With their inputs, convergence produces outputs such as gaps, static simulation results and stochastic simulation results.
  • The purpose of assets and liability management is profit management for implementing effective assets and liability management. We need a decision-oriented balance sheet process given the policy statements. The third Wednesday of every month is designated as the ALCO date. All ALCO members mark the ALCO dates in stone on their calendar in advance and make sure to be there on those dates! ALM Dept. staff make the ALCO packages and Agenda for potential ALM strategy. After resolution, these Agenda items are then implemented.
  • The purpose of assets and liability management is profit management for implementing effective assets and liability management. We need a decision-oriented balance sheet process given the policy statements. The third Wednesday of every month is designated as the ALCO date. All ALCO members mark the ALCO dates in stone on their calendar in advance and make sure to be there on those dates! ALM Dept. staff make the ALCO packages and Agenda for potential ALM strategy. After resolution, these Agenda items are then implemented.
  • Please refer to this diagram which shows the evolution of ALM in KFB. First, I want to present how KFB ’ s ALM has improved and evolved since its inception. The previous ALM system was established in 1995 as “ in-house development ” . During the first half of the year 2000, we focused on static repricing and maturing gap analysis and fund structure analysis. In August 2000, we made a consulting contract with Arthur Anderson and Sunguard Co. to introduce the Bancward ALM package and we completed the introduction of Phase 1 of ALM system in Jan. 2001. At that point, we could produce static NII & NPV simulation results on the basis of deterministic 200 bps up & down interest rate scenarios. But, in the process of the implementation of phase I during 2001, we realized the limitation of static interest rate scenario analysis, which was not reflecting movements of the reference yield curve by assuming only parallel shifts of the reference yield curve and not covering various sources of interest rate risk defined by Basel Accord such as repricing risk, basis risk, yield curve risk, and optionality risk. So, we made another contract with Arthur Anderson and Sungard to introduce a stochastic interest rate scenario model reflecting both customer behaviors and term structures. Currently, we are utilizing the ALCO package which include NII simulation, Basic Surplus, EVE simulation and BIS model.
  • I ’ d like to present the difference between earning perspective and economic value perspective to show how to easily the Korean ALM situation. Most Korean commercial banks have an asset sensitive structure which means a large portion of their loans is CD-linked. Whereas, in terms of Net Present Value, liability sensitive structure is more important because liability ’ s duration is larger than that of assets. When it comes to calculating EaR & VaR, we ’ re using a confidence level which is one grade higher than the external rating of S & P. The bottom line is that EaR is used for ALM-oriented purpose, VaR is used for integrated risk purposes.
  • I would like to present earning gapping and Net Interest Revenue. Gapping earning is generated from mismatching the repricing gap. The reason for this negative gapping figure is that loans have been underwritten for the short-term(1m or 3m repricing) and deposits are taken for the longer term (in case of time deposit : 1 year, demand deposit : 3 years). The NIR of the bank consists in total of Asset ’ s NIR, Liability ’ s NIR & Gapping Earnings.
  • As liquidity risk management tools, the FSS liquidity ratio (in won) and the Basic Surplus are utilized as a regulatory tool and an internal tool, respectively. Regulatory Liquidity Ratio is defined as the cumulative maturity gap (up to 3M) for all assets and liabilities. The current FSS guidelines is that of Regulatory Liquidity Ratio must be maintained at 105%. Also, the internal liquidity ratio, the Basic Surplus is defined as the bank ’ s ability to raise cash within 30 days without principal loss against unanticipated withdrawal, while maintaining the Policy guidelines. These two measurement tools have been utilized complementarily for the bank to manage effectively liquidity risk and to help detailed risk measurement and management.
  • In order for more effective and informed liquidity risk management, the followings items should be considered as important factors. First, we may consider the issuance of MBS to improve the liquidity position of the bank. Second, it is essential to review items with high fluctuation such as one day transaction items because daily fluctuation has a big effect on the structure of the liquidity portfolio. Third, considering saleable loans regarded as liquid assets, they may improve the liquidity of the bank Finally, it is necessary to review the calculation method of the non-core portion of non-maturity deposits for measuring accurately an anticipated withdrawal of the deposit.
  • The Korean market rate has continuously shown a downward trend for a couple of months. Korean interest rates are unlikely to follow the US trend because of different local conditions, that is (the consumption outlook is weak). Most of Korean commercial banks have increased floating based assets such as variable rate mortgage loans. To improve liquidity, we need to issue MBS for securitization. To prevent margin squeeze and to mitigate interest rate risk, we utilized IRS (Interest Rate Swap) for reducing the Repricing Gap and did a macro hedge. To improve net interest income, we ’ re waging a growing core deposit & fixed asset campaign.
  • This slide represents applications to ALCO package. The left side of the table describes the works performed during this project and the right side of the table describes the relationship of those works with the ALCO package. The results from customer behavior analysis and interest rate relationships from term structure analysis have been applied to produce NII, NPV, EAR & VAR.
  • For your reference, I have included the table of contents for our bank ALCO package. I appreciate your attention and I hope that you have found my presentation engaging. Please feel free to ask any questions regarding this subject matter. I thank you again for your time.
  • Transcript

    • 1. Advanced A L M (Asset and Liability Management) Korea University Professor, Jae In kim
    • 2.
    • 3.
    • 4. Table of Contents
      • ALM Overview
      • Objective of ALM system
      • Characteristics of ALM system
      • ALM system Architecture
      • Introduction of ALM Model
      • Effective Asset & Liability Management
      • Evolution of ALM in Commercial Bank
      • Earning Perspective & Economic Value Perspective
      • New FTP (Fund Transfer Pricing) Methodology
      • Resources of Interest Rate Risk
      • Interest Rate Risk measurement
      • Term Structure Model
      • Customer behavior model
      • Liquidity Risk Management
      • Potential ALM strategies
      • New trend of ALM function
      • “ ALM” preparation for New Basel Accord
      • Applications to ALCO Package
      • Contents of ALCO package
    • 5. 1. ALM Overview
      • Asset-Liability Management (ALM) is managing the Interest Rate Risk (IRR) and the Liquidity of the bank (essentially in the commercial banks)
      • ALM ‘s key objectives are to
        • stabilize Net Interest Income ( From an Earning Perspective )
        • Maximize shareholders net worth or Net Portfolio Value (From an Economic Value Perspective )
        • Make sure that the bank doesn’t assume too much risk from the “mismatching” of Repricings and Maturities
      • ALM is the structured decision-making process for comprehensive Balance Sheet Management through the ALCO (Asset and Liability Management Committee)
    • 6. 2. Objective of ALM system
      • Maximizing net interest income
      • Managing IRR within policy limits
      • Maintaining adequate liquidity
      • Managing capital adequacy within policy limits
    • 7. 3. Characteristics of ALM management
      • Maturity & repricing Gap Report
      • Contractual Rate
      • Insight & Convergence
      • Interest Bearing Asset & Liabilities(RSA & RSL)
      • Assumption of ALM Simulation
      • Fixed and floating rate
      • NIM
    • 8. 4. ALM System Architecture INSIGHT CONVERGENCE Current Positions Scenario
      • Interest Rate Scenario
      • Pricing Scenario (Rate Index, Spread, Repricing)
      • New Business Scenario (Volume, Maturity)
      Model
      • Customer Behavior Models
      • Term Structure Models
      • Stochastic Analysis (Phase II)
      • Stochastic NII & NPV Simulation (EaR/VaR)
      • Reports for Current & Historical Analysis
      • Business Volume/Maturity Analysis
      • Product Yield/Spread Analysis
      • Account Classifications
      • Static Analysis (Phase I)
      • Liquidity Gap
      • Repricing Gap
      • Duration & Convexity
      • Static NII & NPV Simulation (Shock Analysis)
      Current & Historical Data Source Systems Transaction Details Transaction Details FDBR Reporting Tool
    • 9. 5. Introduction of ALM Model SCFB ALCO package Best Practice of ALM Formation
      • Composition : CEO, CFO, COO, Head of GM, Head of CR, Head of CB, Head of
      • Market Risk, Head of ALM Global Market and any others nominated
      • Secretary of ALCO : Head of ALCO management
      • The ALCO discusses “ Comprehensive Balance Sheet Strategy” to improve Net Interest Income and Economic Value of Equity within acceptable level of Interest Rate Risk and Liquidity Risk
      Basic Surplus (12.90%) FSS Liquidity Ratio (102.63%) BIS Model ( 11.32%) EVE Simulation Model (305BN) NII Simulation Model ( 12.07%) SCFB ALCO Package Interest Rate Risk Market Risk Capital Adequacy Liquidity Comprehensive Balance Sheet Management ALCO Interest Rate Risk Liquidity Risk Pricing Policy Fund Transfer Pricing
    • 10. 6. Effective ALM (Asset & Liability Management)- ALCO Process
      • Decision-Oriented Balance Sheet Management Process
      • ALCO (Asset & Liability Management Committee)
      • FTP(Fund Transfer Pricing) Function
      Decision-Oriented Balance Sheet Management Process Data Gathering Modeling Report Package Strategy Development (Decision Making) Implementation ALCO Meeting Policy Statements · Asset liability management · Investment securities · Interest rate risk · Derivatives · Liquidity and funds management - Profit planning - Product Pricing & Capital Management
    • 11. Repricing Gap Analysis Duration & Convexity Maturity Gap Analysis Contractual Rate & Maturity Single Scenario Analysis Liquidity Mismatch Ratio Deterministic Interest Rate Scenario Static NII &NPV Simulation Multiple Scenario Analysis Customer Behavior Model Term Structure Model Internal Liquidity Guide line Dynamic NII & NPV Simulation (EaR & VaR) Stochastic Interest Rate Scenario Basic Surplus ALCO Package NII Simulation Basic Surplus EVE Simulation BIS Model 2000 2000.Aug 2001.Jan 2001.Dec 2002.Dec 2005 ALM System Phase I Development & Validation Implementation Phase I ALM Extension Phase II Implementation Phase II                 7. Evolution of ALM in Commercial Bank
    • 12. 8. Earning Perspective & Economic Value Perspective
      • Assumption
      • Confidence level : Adopt Credit Rating which is one grade higher than expected external rating by S&P(Moody’s). (ex. BBB+->A-)
      • Time Horizon : One year horizon
      Earning Perspective Economic Value Perspective
      • Re-pricing Gap Report (“Re-pricing”)
      • NII(Net Interest Income) Simulation
      • Asset Sensitive Structure
      • - RSA > RSL
      • EaR
      • - Mean NII – Confidence level of NII
      • - EaR risk limit
      • ≥ {(Mean NII - Confidence level of NII) ÷
      • Mean NII}
      • ALM oriented purpose(“ ALCO ”)
      • Market Value Report (“Duration”)
      • NPV(net portfolio value) Simulation
      • Liability Sensitive Structure
      • - Liability’s duration > Asset’s duration
      • VaR
      • - Mean NPV – Confidence level of NPV
      • - VaR risk limit
      • ≥ {Mean NPV - Confidence level of NPV }
      • IRM oriented purpose(“ RRC ”)
    • 13. 9. New FTP(Fund Transfer Pricing) Methodology
      • 1. Purpose of FTP :
      • To assign the revenue (net interest income) to those who generate the revenue.
      • By properly assigning the revenue the bank can better focus efforts on the development of the greatest sources of revenue.
      • 2. Definition of FTP:
      • Funds Transfer Pricing (FTP) is the mechanism which allows a business to measure the profit contribution of individual business units, customers, or products by associating the relative economic benefit made to that business.
      • 3. FTP function
      • Improved management accountability
      • - Incentive programs based on revenue, not volume
      • Performance measurement across multiple dimensions
      • - BPR, APR, MPR
      • Provide business with consistent and predictable margins
      • - Lock-in profitability, Matched funding methods
      • Remove risk exposures(IRR) from branch operation
      • - Plenary ALCO can be professionally managed
      • => to instill strong financial disciplines in pricing and balance management
    • 14. 4. FTP Fundamentals Liability business Fund User (Loan) Central pool of all assets & liabilities Fund Provider (Deposit) funds funds FTP Charge FTP Credit Asset business
    • 15. 5. Illustration of Applying FTP Loan margin (2.5%) Mismatch margin (1.5%) Deposit margin (1%) Loan rate(1Y) FTP(1Y) Deposit rate(6M) FTP(6M) 11% 8.5% 7.0% 6.0% 6 M 1Y Total NIM(with FTP) = 2.5% + 1% + 1.5% = 5% Interest Rate Maturity (Loan margin) (Deposit margin) (Mismatch margin)
    • 16.
    • 17. 7. Main contents of New FTP Methodology 1. Types of FTP Benchmark rate Note) Financial debenture(AAA) : Reflecting Bank’s credit rating based on funding cost-based market rate Term Benchmark rate Remarks LCY 1 Day Call 3 Month CD rate Over 6 Month Financial debenture F.D(AAA) FCY Within 1 Year LIBOR by term Over 1Year Interest rate swap curve
    • 18.
      • COL (Cost of Liquidity)
        • Purpose : The purpose of charging cost of liquidity is to compensate the funding cost of securities used to maintain liquidity ratio.
        • Status: Effective from August 1St 2005,COL has been charged to all earning
      Cost of Liquidity (LCY) Tenor Cost of liquidity Aug 1 st 2005~Dec.2006 Jan. 1 st 2007~Current <1Year 10bps 8bps ≥ 1Year <2Year 12bps 10bps ≥ 2Year <3Year 20bps 12bps ≥ 3Year 25bps 20bps Floating loan 10bps 8bps
    • 19. 3. Liquidity premium
      • Purpose: The concept of Liquidity Premium is to enable a structural change in the funding profile of the balance
      Liability (LCY) Asset (LCY) Long term funding receives a premium Long term asset are charged Core portion of CASA 15bps
      • Core portion of
      • Credit card
      • Over drafts
      • Mortgages
      Total charge =Total premium Customer deposits with contractual maturities in over 18months 15bps Client relationship loans with contractual maturity in over 18months
    • 20.
      • Gapping Earning & NIR (Net Interest Revenue)
      Gapping Earning & NIR Remarks Asset NIR (a) 54 bn Asset NIR comes from matched fund charge Liability NIR (b) 52 bn Liability NIR comes from matched fund credit Gapping Earning (c) -26 bn Negative gapping earning comes from the Asset sensitive structure. FTP Paid-In 136 bn FTP paid-in & paid-out come from the repricing Gap report FTP Paid-Out 162 bn NIR of Bank Total (a+b+c) 80 bn NIR consists of Asset NIR and Liability NIR as well as Gapping earning
    • 21. 10. Resources of Interest rate Risk 1. Repricing Risk 2. Yield curve Risk 3. Basis Risk 4. Optionality Risk Ref.) Reinvestment or Refinancing risk
    • 22. 11. Interest rate risk measurement (EAR, VAR)
      • (1) Deterministic(static) Simulation method
      • 금리 EAR = NII B – min(NII up , NII dn )
      • - NII B : Basecase Scinario
      • - NII up , NII dn : 금리 충격 적용 시 NII ( 예 : 기본금리 ±200bp Ramp Up & Down)
      • - EAR is based on static interest rate scinario with some interest rate sensitivity assumption
      • 금리 VAR = NPV o , B - Min (NPV o,up , NPV o,dn )
      • NPV o,B = Basecase Scinario 적용시 NPV
      • NPV o,up , NPV o,dn = 금리충격 적용시 NPV
      • (2) Stochastic Simulation Method
      • 금리 EAR = NII – NII 1%
      • NII : 미래의 특정기간 중 NII 의 mean 값
      • NII 1% : NII 하위 1% confidence level 에 해당하는 값
      • 금리 VAR = NPV o,u -NPV o,1%
      • NPV o,u : 현재기준 NPV 의 평균값
      • NPV o,1% : 현재기준 NPV 하위 1% 에 해당하는 값
      • EAR,VAR is the measurement of maxium loss in NII, NPV from the adverse
      • Movement of interest rate with with 99% confidence level
    • 23.
      • 참고 ) BIS 가 제안한 금리충격 적용 방안
      • 기준금리곡선 ± 200bps 평행이동
      • 보유기간 1 년 기준의 금리변동폭을 과거 5 년
      • ( 금리 변동폭의 분포 1%, 99%)
      • IMF 기간 제외
      • 금리리스크 한도 1. 리스크한도 (economic capital) 가 영업이익 , 자기자본에 비해 적절한 수준
      • 2. 은행계정의 경제적 가치가 Tier1 과 Tier2 합계의 20% 이상 하락
      • 금리리스크 한도 : Ear 과 Var ( 금리 ) 에 기초 , 금리 Gap, duration Gap 지표는 보조
    • 24. 12. Term Stucture Analysis
      • ( 1) Assumption of ALM simulation
      • Interest rate Scenario :- Base, Ramp up and down 200bps,
      • - 500 interest rate paths
      • Replacement rate : -maturity deposit : official notifying rate
      • - Loan : WAR(Weighted Average Rate) of the latest month’s loan
      • - Securities : month-end market rate
      • Interest rate Sensitivity : Regression Analysis between reference Yield curve and Pricing/repricing rates
      • Maturity : - Contractual maturity
      • - Non-Maturity deposit core : 5YR
      • non-core : 1month
      • Market Value Discount rate : FTP yield curve
      • Non Interest Bearing Asset and Liabilities : market value = Book value
    • 25.
      • (2) Deterministic (static) interest rate Scinario Analysis
      • Define reference yield curve
      • Set up the relationship between reference yield curve and
      • Pricing/repricing rates of the products
      • Apply shocks(i , e, ± 100bp, ±200bp) to reference yield curve
      • Produce NII and NPV from each scenario and determine EAR or VAR
      • By comparing with NII and NPV from Basecase
      • □ Limitation of static interest rate scinario analysis
      Current Reference Yield Curve Basecase Up 200bp Down 200bp Basecase
      • Call: +200bp
      • Time Deposit: +150bp
      • Corp. MMDA: +200bp
      • Call: -200bp
      • Time Deposit: -150bp
      • Corp. MMDA: -200bp
      Up 200bp NII NPV Current Reference Yield Curve Static Interest Rate Scenarios Effect on Pricing/Repricing Rates Effect on NII & NPV Future Reference Yield Curve Basecase NII NPV Down 200bp NII NPV
    • 26.
      • (3) Stochastic interest rate scenario analysis
        • Define reference yield curve and short rate
        • Estimate the parameters of stochastic interest rate model (Hull-White model)
        • Set up the relationship between reference yield curve and pricing/repricing rates of the products
        • Generate hundreds of interest rate paths
        • Produce NII and NPV distribution and determine EaR or VaR based on the level of risk tolerance
      …… Current Reference Yield Curve Basecase Basecase NII Mean 1% Earnings at Risk Current Reference Yield Curve Stochastic Interest Rate Scenarios Effect on Pricing/Repricing Rates Distribution of NII & NPV Future Reference Yield Curve NPV Mean 1% Value at Risk
      • Call: +158bp
      • Time Deposit: +175bp
      • Corp. MMDA: +170bp
      • Call: +115bp
      • Time Deposit: +129bp
      • Corp. MMDA: +138bp
      • Call: -83bp
      • Time Deposit: -104bp
      • Corp. MMDA: -115bp
      • Call: -158bp
      • Time Deposit: -175bp
      • Corp. MMDA: -170bp
    • 27.
      • Stochastic Interest Rate Model; Hull-White Model
        • r : Short Rate (Hull-White model assumes the whole yield curve movement is explained by short rate movement)
        • a : Mean Reversion Speed (the speed of adjustment of current rates towards long-run mean)
        •  (t)/a : Long-run Mean (long-run mean changes over time)
        • σ : Volatility (explains uncertainty)
        • dz : Stochastic Term (follows normal distribution of mean 0 and standard deviation )
      Mean Reversion Interest Rate HIGH interest rate has negative trend LOW interest rate has positive trend Long-run Mean
    • 28.
      • Selection of Short Rate and Reference Yield Curve
        • Short rate for Hull-White model should be short-term , risk-free and highly correlated with other market interest rates
        • 3M CD rate is selected as the short rate for Hull-White model based on the correlation analysis
        • Reference yield curve should be risk-free and representative of market interest rates and internal rates of the bank
        • Reference yield curve is composed of 3M CD rate for the shortest-term and Government Bond spot rates for other maturities
      3M CD Rate Short Rate Short-term Risk-free High correlation with other market interest rates 3M 6M 9M 12M 18M 24M 30M 36M 48M 60M 3M CD Rate Government Bond Spot Rates Reference Yield Curve
    • 29.
      • Estimation of Hull-White Model Parameters
        • The dynamics of short rate is characterized by the Hull-White parameters such as volatility(σ) and mean reversion speed(a)
        • Hull-White parameters are estimated through GMM (Generalized Method of Moment) (3M CD rates from Jan 1999 to March 2002)
      a : 0.262689  : 0.008305
      • Generation of Short Rate and Reference Yield Curve Paths
      • Based on short rate paths yield curve paths are generated, which are applied to stochastic simulation.
      • Short rate(CD rates) paths are generated based on the Hull-White parameters.
    • 30.
      • Estimation of Interest Rate Relationships
        • To determine the pricing/repricing rates of the products reference yield curve is related to other market interest rates and internal rates of the bank
        • The relationships of reference yield curve with other interest rates are estimated through the following 5 types of regression models
      Movements of Reference Yield Curve Movements of Pricing/Repricing Rates Relationships between Reference Yield Curve and Pricing/Repricing Rates
    • 31.
      • Interest Rate Risk Measurement
        • VaR from stochastic simulation reflects both customer behavior models and term structure models.
      Static Simulation Stochastic Simulation
      • Customer behavior models
      • Term structure models (Interest rate relationships & Stochastic interest rate scenarios based on Hull-White parameters)
      Ramp Up 200bp 3,779 Basecase 3,713 Ramp Down 200bp 3,613 VaR 101 (2.71%) 99 Percentile 3,531 Mean 3,407 1 Percentile 3,275 VaR 132 (3.87%) INCREASED
    • 32. 13. Customer Behaviour Model Types of Customer Behaviour Model
      • Loan :- prepayment, roll overs, utilization of limit loans
      • - Delinquencies and default
      • Deposit :- pretermination, Rollovers, payment of installment savings
      • - non-maturity deposit decay
      • - overdue deposit decay
      • Type of Model
      • Equation model : Age factor in Deposit pretermination & Loan prepayment
      • Monthly average :- withdraw ratio, roll over ratio
      • - non-maturity Deposit Decay Ratio
      • - over-due Deposit decay
      • - Utilization Ratio of Limit Loan
      • - Payment ratio of Installment Deposit
      • No-maturity Deposit (Demand, Savings, Temporary Deposit)
      • - Core-Deposit = ∑Monthly Average of Volatile Deposit/12-standard D ⇒ Decay ratio
      • in month based on behaviour model
      • - Non-Core = • Volume of E.O.P – core deposit (During 12mths)
      • • Time weighted STD of monthly average during recent 12 mths × 2.33σ
    • 33.
      • Behaviour Model Introduction : ㆍ Incorporates account dynamics
      • ㆍ Incorporates inherent volatility
      • ㆍ Adds creditability to the ALM Process
      • ㆍ Provides more precise results
      • Multi Factor Behavioural Modeling (prepayment)
      • ① Coupon Spread : Coupon Rate VS Competitor or Reference Rate
      • ② Burn out : Describe prepayment over time due to age and pool factor
      • ③ Seasonality : Describe the seasonal Cycles in prepayment Variation
      • ④ Seasoning : Age of Loan influences Prepayment
      • ⑤ Additional Coupon Factors : GDP Figures, Unemployment
    • 34.
      • Customer Behavior Analysis Results
        • Prepayment Ratio = Prepayment Amount of the Month ÷ Contractual Month-end Balance after Scheduled Repayment
        • Pretermination Ratio = Pretermination Amount of the Month ÷ Contractual Month-end Balance after Scheduled Deposit
      First Time Deposit (6M, Consumer ) General Household Loan ( Prime Related , 1Y, Bullet, Variable) General Household Loan ( Deposit Backed , 1Y, Bullet, Fixed) General Household Loan ( Deposit Backed , 2Y, Bullet, Fixed) Trend Actual Age ( month) Ratio Age ( month) Age ( month) Ratio First Time Deposit (6M, SME ) First Time Deposit (1Y, Consumer. ) Ratio Age ( month) Age ( month) Ratio
    • 35. 고객행동모형 적용시 XYZ 은행의 30 일 동안의 잠재적인 현금흐름 주 1) * 만기상환연장비율 (1- 만기인출비율 ), 중도해약비율 , 그리고 정기적금불입비율은 CBM 에서의 과거자료로부처 산출된 결과이다 . 주 2) ** 회전식예금에서 만기상환연장금액은 회전기간에서 만기상환연장금액 + 회전기간에서 종료되었으나 다른계정으로 새롭게 도입된 금액 Total Outflow Maturing (1M) Withdrawal Ratio * amount (a) B/S except overdue Ratio* amount (b) Scheduled Ratio* amount (c) (a)+(b)-(c) Time Deposit (except revolving) 7,000.9 826.0 57.99% 479.0 6,174.9 1.10% 67.8 546.8 66.20% Installment Deposit 1,823.5 120.0 120.0 1,699.3 2.00% 34.0 99.8 88.14% 88.0 66.0 55.06% Customer R/P 68.3 19.5 67.04% 13.1 48.8 0.65% 0.3 13.4 68.55% Cover Bills Sold 16.3 4.4 4.4 4.4 100.00% Sub-Total (1) 8,909.0 969.9 63.56% 616.5 7,923.0 1.29% 102.1 99.8 88.14% 88.0 630.6 65.02% Revolving First Time Deposit ** 3,352.7 702.0 18.66% 131.0 3,111.8 0.61% 19.0 150.0 21.36% Customer CD 4,543.8 385.9 71.93% 277.6 277.6 71.94% Sub-Total (2) 7,896.5 1,087.9 37.56% 408.6 3,111.8 0.61% 19.0 427.6 39.30% Total (3) = (1) + (2) 16,805.5 2,057.8 49.82% 1,025.1 11,034.8 1.10% 121.1 99.8 88.14% 88.0 1,058.2 51.43% Outflow/ Maturing(1M) Outstanding B/S ACCOUNT Insallment Payment Withdrawal by maturity Pretermination
    • 36. 14. Liquidity Risk Management
      • 1. Definition of Liquidity Risk
      • Liquidity risk can arise from a drain on deposits or from new loan demand ( a text book of FI Management )
      • Liquidity can be defined as a book’s ability to provide for legitimate credit need of its client, to meet possible deposit withdrawals, to avoid a fore sale of assets and without to raise money paying abnormal cost and to maintain its financial staying power (SCFirst Bank’s Liquidity Management policy )
      • Liquidity risk results from size and maturity mismatches of A/L.
      • liquidity gaps are the differences, at all future dates, between assets and liabilities of the bank portfolio
      • Gaps generate liquidity risk, the risk of not being able to raise funds in the future to match the size of assets without excess costs ( Risk Management in Banking by Joel Bessis)
    • 37.
      • 2. The purpose of liquidity Risk Management
      • The primary purpose : Survivability
      • . To be able to meet bank’s customers’ demands for cash at all time
      • The secondary purpose : Profit Management
      • . To manage bank’s liquidity position to maximize earnings and return on equity
      • within acceptable levels of liquidity
      • ⇒ Practical applications to bank’s liquidity management
        • Compliance with FSS Requirement
        • Set-up of Internal liquidity management Model
        • Effective FTP Operation for liquidity management
        • Monitor the internal liquidity management indicators
    • 38. 3. Types of liquidity Events in history Market Condition Credit Quality of the Borrower Risk Safe Troubled Asia IMF Crisis,1997 Long-Term Capital Management,1998, Continental Illinois Bank,1984 Mexico,1995 Bank runs and rumors September 11,2001 Normal Security Pacific Bank of America Merger,1992 Savings and Loan Crisis,1980s and early 1990s Barings Singapore
    • 39. 4.Summary of liquidity Risk Management (by the textbook of FI Management)
      • Cause of liquidity Risk
        • Liability-side liquidity risk: Reliance on demand deposit. Core deposit, Net deposit drains
        • Asset-side liquidity risk: Fire-sale prices OBS loan commitment &other credit lines
        • ⇒ Purchased liquidity management ( Fed fund market, R/P markets)
        • Stored liquidity management (Minimum reserve requirement)
      • Measuring liquidity exposure
        • Net liquidity statement
        • Liquidity Index
        • Peer Group Ratio Comparisons
        • Financing Gap and the Financing Requirement
          • Funding Gap= Average loans – Average deposit
          • Financing Requirement= Funding Gap- Liquid Assets
        • BIS Approach: Maturity ladder/ Scenario Analysis
          • Cash inflow- cash out flows= Net funding requirement
          • What if scenarios: Normal conditions, General market crisis and DI-Specific crisis
    • 40.
      • BIS Approach Maturity ladder/Scenario Analysis
        • · Cash inflow-cash outflow= Net Funding Requirement
        • What if scenarios: Normal conditions, General market crisis and DI-specific crisis
      • Liquidity planning
        • Important to know which types of depositors are likely to withdraw first in a crisis
        • Delineate managerial responsibilities clearly
        • The plan details a sequencing of assets for disposal
        • Identification of the size of potential deposit and fund withdrawals over time horizon
      • Liquidity asset management
        • Regulatory requirements for minimum liquid asset reserve
        • Cost of holding liquid assets (T-bills, T-notes, T-bonds)
        • Liquid assets ratio (Secondary or buffer reserve function)
    • 41.
      • Return-risk trade-off for liquidity assets
        • Constrained optimization
          • - Privately optimal reserve holdings
          • - Regulator imposed reserve holding
        • Cash immediacy versus reduced return
        • Reserve management
          • - Undershooting/overshooting of the reserve target
          • - A knife-edge management problem
      • Funding cost and funding risk
        • Trade-off between cost and risk
        • Trade-off between liquidity and interest rate risk
        • Demand deposit are a source of cheap funds, but there is high risk of withdrawal
        • Deposit accounts (passbook savings, MMDA, retail CDs, ,wholesale CDs
        • Fed Funds, RPs
        • Other Borrowings (BA, CP, Medium-term notes, Discount window loans)
        • Securitizations and Sales of loans
    • 42. 5. Liquidity & Funds Management structure Methodologies
      • Basic Surplus
      • Definition
      • Implication
      • How to Measure
      • Liquidity
      • The use of Basic
      • surplus
      • Liquidity Basic Surplus
      • Targets
      • Liquidity Gap
      • Liquidity (Gap)Ratio
      • Liquidity Mismatch
      • (Gap)Ratio
      • Mid-Long-term Funding
      • to Loan Ratio(F/C)
      • Monitors Compliance
      • with Policy
      • Reporting Liquidity and
      • Funds Management
      • Report to Senior
      • Management(CEO,CFO)
      • and ALCO
      • Checking the
      • compliance with policies
      • & guideline(Internal/FSS)
    • 43. 6. Introduction of the internal liquidity risk management model
      • Liquidity can be defined as a bank’s ability to provide for legitimate credit needs of it’s
      • client, to meet possible deposit withdrawals, to avoid a fire sale of assets and without to
      • raise money paying abnormal cost and to maintain its financial staying power.
      • The Liquidity Basic Surplus is a measure of the cash a bank can raise within a thirty day
      • time frame without principal loss adjusted for the liabilities that might leave in the loss
      • of event of a confidence in the institution.
      • The Liquidity Basic Surplus/Deficit is a measurement of:
      • · The bank’s ability to withstand a run
      • · The extent to which the bank is funding with “hot money”
      1. Definition 2. Implication Basic Surplus
    • 44. 3. How to Measure Liquidity @ Basic Surplus expressed in terms of the relationship between Liquid Asset & Short-Term Liabilities which are vulnerable to non- replacement under abnormally stringent condition Basic Surplus = Liquid Asset - Short - Term Liability @ Cash-flow forecast expressed in terms of the relationship between identified funding needs and the estimated level of cash in flows over a 60-day horizon Funds Excess/Requirement = Basic Surplus±Cash-flow forecast First Step Within 30days horizon Second Step Over a 60-day horizon
    • 45.
      • The use of the Basic Surplus/Deficit for measuring liquidity combined with a short-
      • term cash-flow forecast can provide management of the bank with an improved
      • structure within which to develop investment strategies and liability pricing policies.
      • The net result should be more informed balance sheet management, an improved net
      • interest income contribution from the liquidity portfolio and more intelligent liability
      • pricing.
      4. The use of Basic Surplus 5. Liquidity Basic Surplus Targets
      • The ALCO will choose a target number for the Basic Surplus, as a percentage of assets,
      • depending on their estimates of the general business climate, their expectations
      • regarding the future course of interest, & bank’s current financial position.
      • The KFB’s targeted liquidity minimums are as follows :
      • ㆍ Korean Won = 5% ㆍ Foreign Currency = 5% ㆍ Combined Minimum = 5%
      • ⇒ The Bank’s primary focus is on the combined basic surplus. As long as combined basic surplus
      • exceeds minimum, then either of the others could less than the minimum.
    • 46.
    • 47. 7. FSS Regulatory and internal guidelines
      • Liquidity Gaps are the differences between assets and liabilities
      • at both present and future dates
      • Produced by maturity table based on contractual maturity on a monthly base
      • Bank shall maintain the following Liquidity Ratio Guidelines in
      • accordance with FSS Regulatory & Internal Guidelines .
      • • KRW · Liquidity Ratio(3M) : 100% or better
      • • Foreign Currency · Liquidity Ratio(3M) : 80% or better
      • · Liquidity Mismatch(Gap) Ratio(within one week) : 0% or better
      • · Liquidity Mismatch(Gap) Ratio(within one month) : -10% or better
      • · Mid-Long-Term Funding to Loan Ratio : 50% or better
      • Liquidity Gaps provide an additional measure of the liquidity of the bank.
      1. Liquidity Gap
    • 48.
      • 2. Internal guideline
        • Advance /Deposit Ratio
          • Definition: the ratio is calculated by personal and corporate advances divided by personal and corporate
          • KRW Ratio limit:105%
          • Total( Consolidated) ratio limit: 110%
        • Medium Term Funding Ratio
          • Definition: the ration is calculated by liabilities with a maturity of more than one year by assets with a maturity of more than one year
          • KRW Ratio limit: 50%
          • FC Ratio limit: 80%
        • Wholesale Borrowing
          • Definition: the amount of borrowing from wholesale sources that funds the B/S
          • KRW limit
          • FC limit
        • Swapped Fund
          • Definition: the swap fund refers to amount of local currency assets funded by foreign currency. These include FX Swaps and Cross currency swaps
          • FCY Swapped into LCY position limit
    • 49.
        • Maximum Cumulative Outflow (MCO)
          • Definition : the MCO is the daily net cash flow(+) outflow(-) from all on-balance sheet and off-balance sheet items under normal situation
          • O/N limit
          • 2 to 7 days limit
          • 8 to 30 days limit
        • 3 day stress testing
          • Definition: the 2 day stress condition caused due to a result of a bank-specific problem such as a large credit loss, fraud or system failure, resulting in an unexpected outflow of deposit
          • All cash flow limit> 0
        • Liquidity contingency trigger events
          • Definition: liquidity contingency plan include trigger event that indicate or could cause stressed liquidity situation created by a name problem in the local market
      Items Trigger
      • O/N Call rate
      High than target rate by 10 bps
      • Repo
      Access 3 consecutive business days
      • MCO
      Exceeds the limit by 50% for 3 biz days
      • FCY WB
      Breach of intragroup limit for 3 biz days
    • 50. 1. Liquidity Risk Management Tools The FSS Liquidity Ratio in KRW as regulatory tool and the Basic Surplus as internal tool, for liquidity risk management. 8. Review of Liquidity Risk Management Regulatory Internal Regulatory Liquidity Ratio in KRW Internal Liquidity Ratio(Basic Surplus) = Liquid assets due within 3M divided by Liquid liabilities due within 3M Defined as the cumulative maturity gap up to 3M for all assets and liabilities. = Liquid assets less Short-term Liabilities Defined as the bank’s ability to raise cash quickly (within 30 days) against the unanticipated withdrawal without paying an abnormal cost. 2. Comparison of Two Methodologies Purpose Purpose Regulatory Liquidity Ratio Internal Liquidity Ratio 1) Regulatory Guideline applied to all banks across the board ▷ 3M Liquidity Ratio in KRW ≥ 100% 2) Calculated by normally expected cash inflow/outflow within 3M 3) All Cash flow is included. 4) Customer Behaviors Model is not introduced. 1) Internal Guideline applied to Individual Bank ▷ Basic Surplus ≥ % of total assets 2) Calculated based on bank ’ s ability to raise funding under abnormally stringent condition within 1M (Assessing Net Funding Requirement) 3) Cash flow from loans is not included. 4) Customer Behavior Model such as Prepayment, Pre-termination, Rollover and Installment ratio is introduced.
    • 51.
      • 3. Consideration factors in Liquidity Risk Management
      • 1) Issuance of MBS
        • To improve both the Regulatory and internal liquidity ratio
        • To increase equity ratio
      • 2) Review of target items with high fluctuation ( 1 day transaction items)
      •  Target items : Reserve Deposit with Central Bank
      • Call loan/money
      • Unsettled exchanged Dr./Cr.
      • Agencies
      • 3) Saleable loan (Syndicated and Guaranteed Loan)
      •  Definition of saleable loan : can be sold in the market within 30 days under abnormally stringent
      • conditions without abnormal cost
      • 4) Non-core portion of non-maturity deposit calculation method
      •  Time weighted STD of monthly average during recent 12 months × 2.33 σ
    • 52. 15. Potential ALM Strategies
      • To improve Net Interest Income
      • To maintain Interest Rate Risk
      • within acceptable level
      • To foster Margin Enlargement
      Yield enhancement strategies Growing core deposit Growing variable deposit Growing fixed assets Dynamic Hedge Securitization Issuance of MBS Macro hedge (Use of Interest rate Derivatives) IRS for reducing the Re-pricing Gap
    • 53.
      • Assets perspective
      • Increasing fixed rate mortgage loans(including hybrid loans)
      • Adjusting the floor rates of variable mortgage loan
      • Growing fixed income securities
      • - Investment amount : 1 trillion
      • - Available securities : The FIS approved by the policy for securities
      • investment such as Gov’t bond, Gov’t agency securities
      • MSB, Financial Debenture and Corp. debenture
      • - Target yield & Amount : AVG, yield of 4.5% ~ 4.6% : 600BN
      • AVG, yield of 4.6% ~ 4.7% : 800BN
      • AVG, yield of over 4.7% : 600BN
      • - Time Limit : Dec. 2004
    • 54.
      • (2) Liability perspective
      • Introducing “floating rate term deposits” as a counterpart of floating rate mortgage loans to partially offset the hugely re-priced interest rates in floating rate mortgage loans
      • Raising mid-long term funds by floating rate base
      • - in case of fixed rate funding, it should be transformed to floating rate one by interest rate SWAP
    • 55.
      • (3) Derivative perspective
      • Entering into interest rate SWAP(Micro hedge)
      • - Underlying instruments : Financial Debenture which bank has issued,
      • with remaining maturity of over lyear
      • - Notional Amount : 1 trillion
      • - Type of IRS : Bank pays floating rates(CD+spread) & receives fixed rates
      • - Hedge cost : Hedge cost as to transforming fixed liability into
      • floating one through IRS to reduce repricing GAP
      • * Hedge cost in case of transforming fixed FD into floating rate FD
      (as of Oct. 7. 2004) 1 year FD(fixed) (a) 1 YR SWAP rate Floating rate after SWAP (b) Hedging cost (b-a) 3.63% 3.45% 3MCD + 0.18% (3.45%+0.18%=3.72%) -0.09%
    • 56. 16. New trend of ALM function
      • 1. ALM function of “treasury” (ALM/global market)
      • Function as a profit center
      • - apply FTP to each transaction
      • - manage the mismatching Gap
      • 2. ALCO function of “finance” (ALCO management under CFO)
      • Preside ALCO meeting and upgrade ALCO pack
      • Comprehensive balance sheet management
      • Improve NII & NPV within acceptable risk through B/S restructuring plan
    • 57. 16-1. Three functions of an advanced ALM system
      • 1. ALM in the global market
      • Mismatch gap management
      • Provide FTP with trading book
      • Produce daily P & L impact
      • Manage the maturity gap profile
      • Operate daily ALM system
      • 2. Market risk
      • Monitor daily risk limit(Investment Securities & derivatives)
      • PV01(Interest Rate Sensitivity) & VaR
      • Set up the position limit for banking book, funding book & trading book
      • 3. ALCO Management
      • Ownership and control of FTP methodology
      • Capital adequacy management (BIS ratio, TierⅠratio & Equity ratio)
      • Upgrade ALCO action points through ALCO starategies
      • Converge “daily ALM” into “monthly ALCO”
    • 58. 17. “ALM” preparation for New Basel Accord
      • 1. Cover various sources of interest rate risk defined by New Basel Accord
      • Repricing risk, basis risk, yield curve risk & optionality risk
      • 2. Manage Interest Rate Risk from Earning Perspective and Economic Value Perspective
      • with regards to variation of interest rate
      • Four objectives of ALM : maximizing NII & NPV within the acceptable risk level(EaR & VaR)
      • 3. Introduce customer behaviour model and term structure model
      • More accurate measurement of risk considering actual, not contractual, cash flow characteristics
      • More realistic interest rate scenarios with reasonable assumptions on interest rate sensitivities
      • 4. Need “what if” simulation function for implementation of strategic and forward projection
      • Static(deterministic) & stochastic simulation for NII, NPV, EaR & VaR
      • 5. Internal model for ALCO pack
      • Improve decision –oriented Balance Sheet management process
      • Develop internal model for liquidity( Basic Surplus etc)
      • Note) - principles for management and supervision of interest rate risk
      • - sound practices for managing liquidity in banking organization
    • 59. Customer Behavior Analysis ALM System Repricing Gap Loans Prepayments Utilization of Limit Loans Rollovers Deposits Preterminations Payment of Installment Savings Rollovers Term Structure Analysis Parameters for Hull & White Model (Volatility & Mean Reversion Speed) Interest Rate Relationships Maturity Gap EaR & VaR ● ● ● ● ● ● ● ● ● ● ● ●
      • The results from Customer Behavior Analysis have been selectively applied to the calculation of Repricing Gap , Maturity Gap, NII & NPV , EaR & VaR .
      • Parameters for Hull & White model and interest rate relationships from Term Structure Analysis have been applied to the stochastic simulation to produce EaR & VaR .
      • Interest rate relationships from Term Structure Analysis have been applied to the simulation to produce NII & NPV , EaR & VaR .
      ● Direct Inputs, ALCO Package 18. Applications to ALCO Package NII & NPV Simulation ● ● ●
    • 60. 19. Contents of ALCO package
      • Outlook for Financial Market Rates
      • Balance Sheet Comparison
      • Net Interest Income(NII) Simulation
      • Actual Yield Analysis
      • Liquidity Risk Management
      • Re-pricing GAP & Fund Matrix
      • Earnings at Risk(EaR)
      • Value at Risk(VaR)
      • Capital Adequacy
      • Analysis of Securities Investment & FX Position
      • ALCO strategies (ALCO Action Points)
      • ALCO Agenda and Discussion topics

    ×