1. © Brammertz Consulting, 20091Date: 07.12.2015 Unified Financial Analysis Risk & Finance Lab Chapter 14: Dynamic simulation of banks Willi Brammertz / Ioannis Akkizidis

2. © Brammertz Consulting, 20092Date: 07.12.2015 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. © Brammertz Consulting, 20093Date: 07.12.2015 Example of typical chart of account

4. © Brammertz Consulting, 20094Date: 07.12.2015 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

5. © Brammertz Consulting, 20095Date: 07.12.2015 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

6. © Brammertz Consulting, 20096Date: 07.12.2015 Non-maturity products Simple in appearance, difficult in praxis > Example

7. © Brammertz Consulting, 20097Date: 07.12.2015 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

8. © Brammertz Consulting, 20098Date: 07.12.2015 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

9. © Brammertz Consulting, 20099Date: 07.12.2015 Forecasting equity > Equity is a pure logical conseqence > Equity check!

10. © Brammertz Consulting, 200910Date: 07.12.2015 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. © Brammertz Consulting, 200911Date: 07.12.2015 Analysis (Type III) Liquidity risk

12. © Brammertz Consulting, 200912Date: 07.12.2015 Analysis (Type V) Balance sheet and P&L forecast

13. © Brammertz Consulting, 200913Date: 07.12.2015 Forecasting NPV and sensitivity

14. © Brammertz Consulting, 200914Date: 07.12.2015 Forecasting NPV under MC

15. © Brammertz Consulting, 200915Date: 07.12.2015 Integrating market and credit risk

16. © Brammertz Consulting, 200916Date: 07.12.2015 Dynamic funds transfer pricing