Unified Financial Analysis Risk & Finance Lab

1. Unified Financial Analysis Risk & Finance Lab Chapter 14: Dynamic simulation of banks Willi Brammertz / Ioannis Akkizidis

2. The role of the chart of account • Fulfills the completeness condition • Chart of account is a first order product catalogue • Contracts inside an account more or less homogenous • Study chapter 14.1 carefully

3. Example of typical chart of account

4. Forecasting new productionLoans, mortgages and bond issues • Maturity contract types (PAM, ANN, RGM…) • Sluggish and predictable to a good extent • Product mix • Characteristics • Spreads • Ratings

5. Forecasting new productionCurrent accounts, savings and deposits • Mostly non-maturity products • Needs dynamic replication portfolio technique • Volume: Sluggish and reasonable predictable under normal conditions • New and old volumes not distinguishable • Strongly rate sensitive • Not sluggish in crisis! • Rate: Partially under own control • Linked to special rates (product rates) • Difficult to quantify effect on sensitivity

6. Non-maturity productsSimple in appearance, difficult in praxis • Example

7. Forecasting new productionTrading and OBS • Highly volatile positions • Difficult to forecast • Different approaches • Income forecasting • Contract forecasting • Hedging part (ALM) can be modeled as a residual

8. Forecasting new productionLiquidity, interbank • Classical cash-flow balancing accounts (also in reality) • But imbalance shouldn‘t be too large • Large imbalances should be corrected „manually“ • Automatic correction possible

9. Forecasting equity • Equity is a pure logical conseqence • Equity check!

10. Simulation technique applied • Parameters are turned into financial contracts • At each simulation end date, a full set of financial contracts exists • Dynamic balance sheets can be calculated by sequential application of static analysis at each end date • P&L statements can be derived analogously

11. Analysis (Type III)Liquidity risk

12. Analysis (Type V)Balance sheet and P&L forecast

13. Forecasting NPV and sensitivity

14. Forecasting NPV under MC

15. Integrating market and credit risk

16. Dynamic funds transfer pricing