© Brammertz Consulting, 20091Date: Unified Financial Analysis Risk & Finance Lab Chapter 14: Dynamic simulation of banks Willi Brammertz / Ioannis Akkizidis

© Brammertz Consulting, 20092Date: 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

© Brammertz Consulting, 20093Date: Example of typical chart of account

© Brammertz Consulting, 20094Date: Forecasting new production Loans, mortgages and bond issues > Maturity contract types (PAM, ANN, RGM…) > Sluggish and predictable to a good extent > Product mix > Characteristics > Spreads > Ratings

© Brammertz Consulting, 20095Date: Forecasting new production Current 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

© Brammertz Consulting, 20096Date: Non-maturity products Simple in appearance, difficult in praxis > Example

© Brammertz Consulting, 20097Date: Forecasting new production Trading and OBS > Highly volatile positions > Difficult to forecast > Different approaches > Income forecasting > Contract forecasting > Hedging part (ALM) can be modeled as a residual

© Brammertz Consulting, 20098Date: Forecasting new production Liquidity, 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

© Brammertz Consulting, 20099Date: Forecasting equity > Equity is a pure logical conseqence > Equity check!

© Brammertz Consulting, Date: 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

© Brammertz Consulting, Date: Analysis (Type III) Liquidity risk

© Brammertz Consulting, Date: Analysis (Type V) Balance sheet and P&L forecast

© Brammertz Consulting, Date: Forecasting NPV and sensitivity

© Brammertz Consulting, Date: Forecasting NPV under MC

© Brammertz Consulting, Date: Integrating market and credit risk

© Brammertz Consulting, Date: Dynamic funds transfer pricing