2. 2 July 2015
XA Bank Switzerland is a branch of AXA Bank Europe, which is located in Brussels.
In order to leverage synergies, a central treasury management in Brussels has been
established. The central treasury team is not only responsible for the asset side
liquidity management, but also responsible for the liability side liquidity management for both
the head office as well as the branches.
The branch needs liquidity in order to meet the day-to-day payment settlement. Hence to
optimize the liquidity management and ensure sufficient funding sources, the branch is
conducting a study regarding assessing all daily cash inflows and outflows of its deposit
portfolio as well as the impact on the liquidity risk management.
Liquidity Risk at AXA Bank Europe Switzerland and rationale for
liquidity risk management
Liability-side liquidity risk
Liquidity risk arises from the liability-side when the deposit accounts issued by the bank have
a high degree of withdrawal risk. The bank normally meets withdrawal requests with
immediate cash payment, but they have the legal right to delay, which provides important
withdrawal risk control to the liquidity management.
In 2009 the AXA Bank Switzerland's balance sheet has one year of term deposit and a large
amount of short-term 2in1 deposit liabilities. The term deposit contracts are one year of fixed-
maturity instruments with deposit values fewer than 5 millions for one depositor. The bank
knows the exact scheduling of interest and principal payments to depositors holding such
deposit claims, since these payments are contractually specified. As such, the bank can
directly control fund inflows and outflows by maturities of the time deposits.
2in1 deposit accounts issued by the bank have a high degree of withdrawal risk due to the fact
that such deposit accounts are contracts that give the holders the right to put their claims back
to the AXA Bank Switzerland on any given day and demand payment of CHF 50'0001
per
month of their deposit claims. For amounts above CHF 50'000 a notice is required one month
in advance. It means an individual 2in1 deposit account holder with a balance of CHF 50'000
can demand cash to be paid when the depositor has exceptional liquidity needs. But, it doesn't
means that the bank is absolutely powerless to mitigate deposit withdrawals, especially if
value day for payments is designed for daily payment process. Finally, this allows the local
treasurer indirectly control the withdrawal risk on such accounts.
Table 1 shows the aggregate balance sheet of the assets and liabilities of AXA Bank
Switzerland, February 2009. As seen in this table, total deposits are 78 percent of total
liabilities (with 49 percent 2in1 deposits). By comparison, cash assets are 51 percent of total
assets.
1
In the situation, an individual 2in1 account holder can withdraw an amount of CHF 20'000 immediately via
internet-banking at any time. It means the limit setting of amount CHF 50'000 per calendar month is not actual
A
3. 3 July 2015
TABLE 1 Asset and Liabilities of AXA Bank Switzerland, February 2009 (in CHF)
Assets Liabilities
Total cash assets 13'058'395.8019'869'563.96 (12'632'444.21 of 2in1)
Total deposits (2in1+TD)=0.78
total liabilities
Total loans Total borrowings (loans)
Other assets Other liabilities
Total assets 25'579'766.7925'579'766.79 Total liabilities
In the bank business growing phase, we know that normally only a small proportion of the
deposits will be withdrawn on any given day. Most deposits act as consumer core deposits on
a day-by-day basis, providing a relatively stable of deposit funds for the bank. Moreover,
deposit withdrawals may in part be offset by the inflow of new deposits (and income
generated from the bank's balance-sheet activities. The withdrawals value of deposits are also
somewhat predictable in that, the settlement of payment is controlled by defined value day
related to Switzerland SIC clearing and Post Finance transaction systems.
Describe the daily cash inflows and outflows on the 2in1 deposit accounts on a
given banking day
Cash inflow
o New deposits inflows processed via SIC and Post Finance
o Official funding of existing accounts processed via SIC
Cash outflow
o 2in1 deposit withdrawals processed via SIC, cards, bancomat,
tancomat, pointofsales and Post Finance processed via EZAG
Upon value day the incoming via SIC and outgoing payments via SIC, bancomat, tancomat,
pointofsales are automatically lodged in the Finnova system throughout the day while the
intraday payment limits currently not used to control the aggregated exposure resulting from
processing payments in advance of receipt of cover. Availability is restricted to the delivered
daily report L80 that shows up all of the SIC aggregated daily payment data and net payment
update.
4. 4 July 2015
Report L80: Example
The daily incoming and outgoing payments on value day via Post Finance (ESR, EGAV and
(EZAG) are automatically lodged in the Finnova system once in the morning and outgoing
payments (EZAG) also once in the afternoon. The aggregated incoming and outgoing
payments are checked in Post Finance E-Finance and local treasury manually releases
outgoing payment via EZAG file.
Note the daily payment settlement covers the payments on the bank deposit accounts in 2in1
and term deposit.
Describe how to monitor all daily completed inflows and outflows
processing in the systems on a given banking day and net payment
updates
The local treasury unit monitors daily settlement payments using the local systems via the
Mint I24 message tool, which shows up real time net payment updates of SIC clearing
account. (See more details below).
Finnova interface Mint system
SIC real time cleared inflows in Mint during day
SIC real time cleared outflows in Mint during day
SIC real time cleared balance during day
5. 5 July 2015
The net payment update will show up in the Mint system during the day. The local
treasurer has to make sure that the sum of the payments across collected incoming and
outgoing amounts matches the expected payments. Having a payment position is not a
normal situation (e.g. excess payment), the local treasurer has to investigate all such cases
for accuracy in Finnova for that can be generated as a result of technical problems even if
they fit under the liquidity needs.
Finnova delivered cash payment transaction files of Post Finance in the morning
Inflow files: ESR, EGA-V
Outflow file: EZAG
6. 6 July 2015
The local treasury checks aggregated incoming and outgoing payments in Post Finance E-
Finance. Before 14:30 pm of the day the outgoing payment via EZAG files is manually
released by treasury. In addition, file report that shows up all of the incoming and outgoing
payments from Finnova system in the early morning is in use (See screen above).
Define the major ways to manage bank's daily liquidity needs
Calculate the net deposit flow based on the systems and procedures
On a daily basis, the local treasurer will review all incoming and outgoing payments for
intraday liquidity needs with appropriate details in Finnova and Post Finance. Use the Mint
real time net payment update tool and delivered Post Finance payment files and investigate
them in the Finnova in order to check the latest payment data found under the 2in1 accounts
(See detail screens below) and see how these got processed. Calculate the expected net
deposit payment before 12:00 pm as business process procedures.
8. 8 July 2015
Screen of Post Finance incoming and outgoing payments in Finnova
Management sets the threshold limit depending upon the product types and one
calculates the corresponding liquidity need probability based on the characteristics
of the daily net payments
The bank should clearly articulate a liquidity risk tolerance that is appropriate for its business
strategy and conduct probability distribution on a regular basis for a bank-specific design to
identify sources of potential liquidity strain and to ensure that current exposures remain in
accordance with a bank's established liquidity risk tolerance (limit)
Calculate the distribution of the daily incoming and outgoing payments and the
probability that the sum of the outgoing payments exceeds a certain limit
Local treasury unit must monitor the resulting net deposit withdrawals. Specifically, over
time, we can normally predict-with a good degree of accuracy-the probability distribution of
net deposit drains (the difference between deposit withdrawals and deposit additions) on any
given normal banking day. Apart from predictable daily seasonality to deposit flows, there are
other seasonal variations, many of which are, to a greater or lesser degree, predictable. For
example, many retail banks face above average deposit outflows around the end of the year
and in the summer (due to Christmas and the vacation season).
TABLE 2 shows the intraday net payment of 2in1 and Term Deposit of AXA Bank
Switzerland, February 2009. As seen in the following FIGURE a1, for AXA Bank
Switzerland, a bank is to be growing, it must have a mean or average net deposit payment,
such that new deposit funds more than offset deposit withdrawals. Thus, the peak of the net
9. 9 July 2015
payment probability distribution would be at a point to the right of zero. See in FIGURE a2
the Percent 0.03 of total liability (where the distribution of net payment is peaked at
777'918.38/25'579'766.79 =0.03 percent of total B/S liability) the bank is receiving net cash
inflows with the highest probability.
TABLE 2 Net payment distributions generated from all intraday net deposit payment of AXA Bank Europe,
Switzerland, February 2009 (in CHF)
Intraday Net Payment of 2in1 and TD accounts
From
2009/2/1
Payment Date
=Value Date
SIC Thereof SIC Thereof
SIC Net
payment 2in1
+TD Deposits
PostFinance
Post Finance
Net payment
2in1+TD
Deposits
Total Intraday
Net deposit
payment
Total Incoming a+b+c
a.Total
balance last
day
b.Treasury
Deal
c.PC
Transfer
2in1 +TD
Deposits (+)
Total Outgoing Treasury
2in1+TD
Deposits (-)
Incoming Outgoing
02/02/2009 (Mon) 1,654,673.30 1,616,603.30 1,200,311.16 416,292.14 0.00 38,070.00 454,440.84 453,687.69 753.15 37,316.85 0.00 0.00 0.00 37,316.85
03/02/2009 (Tue) 1,664,928.93 1,653,928.93 1,200,232.46 453,696.47 0.00 11,000.00 491,455.43 490,900.66 554.77 10,445.23 40,600.00 0.00 40,600.00 51,045.23
04/02/2009 (Wed) 1,697,513.28 1,644,413.28 1,173,473.50 470,939.78 0.00 53,100.00 523,098.02 521,815.04 1,282.98 51,817.02 16,100.00 0.00 16,100.00 67,917.02
05/02/2009 (Thu) 1,979,209.40 1,866,240.40 1,174,415.26 521,825.14 170,000.00 112,969.00 593,765.45 592,300.65 1,464.80 111,504.20 90,000.00 0.00 90,000.00 201,504.20
06/02/2009 (Fri) 2,168,426.07 1,977,876.07 1,385,443.95 592,432.12 0.00 190,550.00 794,258.04 790,476.94 3,781.10 186,768.90 43,500.00 0.00 43,500.00 230,268.90
07/02/2009 (Sat)
08/02/2009 (Sun)
09/02/2009 (Mon) 3,086,059.67 2,229,951.37 1,374,168.03 755,783.34 100,000.00 856,108.30 1,005,058.33 985,257.53 19,800.80 836,307.50 63,900.00 10,947.50 52,952.50 889,260.00
10/02/2009 (Tue) 3,880,626.02 2,967,026.02 2,081,001.34 886,024.68 0.00 913,600.00 1,775,240.97 1,772,780.87 2,460.10 911,139.90 150,250.00 0.00 150,250.00 1,061,389.90
11/02/2009 (Wed) 4,598,327.67 4,198,312.45 2,105,385.05 1,757,927.40 335,000.00 400,015.22 2,819,355.94 2,816,938.99 2,416.95 397,598.27 185,300.00 0.00 185,300.00 582,898.27
12/02/2009 (Thu) 4,754,281.76 4,357,760.65 1,778,971.73 2,578,788.92 0.00 396,521.11 3,162,821.35 3,159,510.67 3,310.68 393,210.43 81,525.15 0.00 81,525.15 474,735.58
13/02/2009 (Fri) 5,367,754.25 4,751,032.25 1,591,460.41 3,159,571.84 0.00 616,722.00 3,658,389.99 3,635,301.34 23,088.65 593,633.35 126,500.00 0.00 126,500.00 720,133.35
14/02/2009 (Sat)
15/02/2009 (Sun)
16/02/2009 (Mon) 6,846,057.91 5,795,248.87 1,709,364.26 3,585,884.61 500,000.00 1,050,809.04 4,345,933.07 4,305,019.91 40,913.16 1,009,895.88 308,540.00 310.35 308,229.65 1,318,125.53
17/02/2009 (Tue) 7,549,385.41 7,035,976.18 2,500,124.84 4,205,851.34 330,000.00 513,409.23 5,524,235.69 5,513,210.14 11,025.55 502,383.68 308,700.00 762.10 307,937.90 810,321.58
18/02/2009 (Wed) 7,829,969.33 7,610,149.68 2,025,149.72 5,284,999.96 300,000.00 219,819.65 6,097,488.24 6,091,301.54 6,186.70 213,632.95 293,098.50 0.00 293,098.50 506,731.45
19/02/2009 (Thu) 8,719,814.28 8,025,022.68 1,732,481.09 5,942,541.59 350,000.00 694,791.60 6,526,861.91 6,446,761.91 80,100.00 614,691.60 406,527.50 0.00 406,527.50 1,021,219.10
20/02/2009 (Fri) 9,539,704.73 8,614,991.76 2,187,955.42 6,427,036.34 0.00 924,712.97 7,465,039.71 7,414,862.26 50,177.45 874,535.52 479,129.00 1,004.40 478,124.60 1,352,660.12
21/02/2009 (Sat)
22/02/2009 (Sun)
23/02/2009 (Mon) 11,378,831.75 9,908,738.80 2,071,585.27 7,167,153.53 670,000.00 1,470,092.95 8,569,574.30 8,561,503.55 8,070.75 1,462,022.20 155,703.60 6,465.65 149,237.95 1,611,260.15
24/02/2009 (Tue) 12,065,342.85 11,106,888.00 2,805,196.48 8,201,691.52 100,000.00 958,454.85 9,806,174.38 9,802,698.59 3,475.79 954,979.06 95,223.45 0.00 95,223.45 1,050,202.51
25/02/2009 (Wed) 12,690,587.50 11,992,784.33 2,255,275.52 9,157,508.81 580,000.00 697,803.17 10,211,926.70 10,196,271.65 15,655.05 682,148.12 587,347.65 0.00 587,347.65 1,269,495.77
26/02/2009 (Thu) 13,926,646.74 12,893,668.54 2,475,478.90 9,968,189.64 450,000.00 1,032,978.20 11,254,785.75 11,228,404.94 26,380.81 1,006,597.39 467,025.00 1,657.00 465,368.00 1,471,965.39
27/02/2009 (Fri) 14,613,737.81 13,846,795.15 2,665,984.15 10,940,811.00 240,000.00 766,942.66 12,558,761.30 12,401,906.15 156,855.15 610,087.51 234,390.00 15,561.15 218,828.85 828,916.36
28/02/2009 (Sat)
10. 10 July 2015
FIGURE 1 Positive net deposit payment distribution with probability: in growing phase
FIGURE 2 the impact of a positive net deposit on ALM with probability distribution: in growing phase
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
0
0.0000001
0.0000002
0.0000003
0.0000004
0.0000005
0.0000006
0.0000007
0.0000008
0.0000009
CumulativeProbability
ProbabilityDensity
Net Deposit Payment(cash inflow-cash outflow)
Intraday Net Deposit Payment Distribution
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
0
5
10
15
20
25
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
CumulativeProbability
ProbabilityDensity
Net Payment /Toal Monthly Liability
Intraday Net Deposit Payment
11. 11 July 2015
Over time, the net deposit payment distribution is assumed to be strongly peaked at the high
percent net deposit withdrawal level. The bank expects high percent of its net deposit funds to
be withdrawn on any given day with the highest probability.
The effect of net deposit drains on the Balance Sheet (Liquidity risk and ALM)
For the case if the bank has a mean or expected net deposit drain, so its new deposit funds and
other cash flows are expected to be insufficient to offset deposit withdrawals. The liability
side of its balance sheet is contracting. TABLE 3 illustrates a case of 5 percent net drain of
deposit accounts of total liability (or in term of CHF, a drain of CHF 5 millions)
TABLE 3
The Effect of Net Deposit
Drains on the B/S (in millions
of CHF)
Before the Drain
Assets Liabilities
Total cash assets (2in1) 70 Total deposits (2in1 +TD)
Total loans (TD) 10 Total borrowings (loans)
Other assets 20 Other liabilities
Total assets 100100 Total liabilities
After the Drain
Assets Liabilities
Total cash assets(2in1) 65 Total deposits (2in1 +TD)
Total loans (TD) 10 Total borrowings (loans)
Other assets 20 Other liabilities
Total assets 10095 Total liabilities
Clarify the roles, tasks, tools, processes and responsibilities of entities
involved in liquidity risk management process and measures used to
control liquidity risk at AXA Bank Switzerland
Even though liquidity needs is highly provided by the parent, AXA Bank Europe,
Brussels, and management fully understand all aspects of liquidity risk, the branch's
intraday liquidity risk management process should be effective in identifying, measuring,
monitoring, and controlling liquidity. The intraday liquidity risk management is to be
implemented in commensurate with the nature of the branch's operations and the branch
should also envisage a great role for intraday liquidity risk management.
Roles and responsibilities for liquidity risk management process
12. 12 July 2015
Potential exposure to loss of earnings or capital due to high liability costs or unplanned
asset reduction may be substantial
The key responsibilities are: working capital, cash management, short- and long-term
liquidity, corporate finance and foreign exchange (FX) risk.
Head office Treasury & ALM Management
-Define centre treasury process and cash management methodology by product
-Define daily fund transfer by product
-Support liquidity plan and funding
Switzerland-Branch Treasury
-Set the level of value date for payments settlement and payment limits
-Monitor payment from existing deposit accounts vs. limit
-Follow up with back office on any limit excess
-Monitor intraday liquidity need
There is always dialogue between head office treasury and branch treasury to
discuss details of required reserve and treasury process as well as to ensure head
office treasury provide branch treasury with useful numbers
Head office treasury & ALM management group contacts
Treasury & ALM management Belgium
This procedure sets out the approach to what intraday liquidity risk management
on 2in1 accounts should be performed, and how it should be carried out.
Local treasurer calculate the expected net deposit payment from the available
source system or other reliable sources before 12:00 pm as business process
procedures defined for intraday liquidity management of SNB and Post Finance.
Where a liquidity risk is identified, it will be communicated to local CFO. Where
liquidity drain is communicated to local CFO, the local CFO must determine if the
pending payments will be permitted to settle. If the additional liquidity fund is
accepted, the local CFO should work with the responsible units to unwind the
position, obtain collateral, or purchase liquidity.
Local treasurer, in conjunction with the CFO, will be responsible for enforcing the
liquidity need procedures. Local treasurer will review all additional liquidity funds
that are marked as "Closed by CFO" on a daily basis to ensure that the action taken
is satisfied.
On a quarterly basis local treasurer provides head office treasury with the
information about borrowed additional liquidity fund.
Management information systems focus on significant issues and produce timely,
accurate, complete, and meaningful information to enable effective management of
liquidity
13. 13 July 2015
Definition &
implementation of
liquidity framework:
risk definition, limits,
control, and reporting
Local Treasury
/CFO
Local CFO and
/or HO Treasury
Local Treasury User
Constitution and validation of risk evaluation
methods and model
HO ALM
Measurement &
analysis of Liquidity
position
Information of ALM
Local CFO presents the liquidity position and HO
ALM explains the recommendations and decision
Analysis of Liquidity
position and
preparation of
recommendations
HO Treasury & ALM
HO Treasury & ALM presents the liquidity position & recommendation and take decisions in order to
optimize the liquidity position
Application of HO
Treasury & ALM
decisions
-Max. fund transfer
-Dealing room for
borrowing liquidity
HO RM
Creation of a new
liquidity borrowing
Any change in
liquidity position
Follow up of
decisions
application
