WHITE PAPER

SAS® Risk Management for Banking: Asset and Liability Management Quick Start Service

SAS White Paper

Table of Contents

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Why Is a Quick Start Solution Important? . . . . . . . . . . . . . . . . . . . . . . . 1

Analytics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Instrument coverage and pricing functions . . . . . . . . . . . . . . . . . . . . . . 2

Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

User-defined and simulated scenarios . . . . . . . . . . . . . . . . . . . . . . . . . 3

Time Buckets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Hierarchies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Portfolio forecast, pipeline hedging and other hedging strategies . . . . 4

Portfolio selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Interest rate models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Prepayment models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Deposits (runoff) models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Fund Transfer Pricing and Profitability Analysis . . . . . . . . . . . . . . . . . . . 6

Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Data Loading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

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SAS® Risk Management for Banking: Asset and Liability Management Quick Start Service

OverviewYou’ve probably purchased software and had the very reasonable expectation that you could load it onto your existing platform and be productive in a very short time . But then you discovered that you had to configure files or perform some other time-consuming, resource-draining procedures first .

Let’s face it . The reality is that enterprise software implementation is often complex, but it’s still frustrating, right? But that doesn’t have to be the case .

A good example in banking is with asset and liability management (ALM) software . You need it to assess interest rate risk and for data management and reporting . You’re looking for a fast delivery process with special focus on the majority of the balance sheet in both banking and trading books .

You need a solution that enables you to quickly execute portfolio strategies and hedging scenarios to view net interest income or economic value impact based on the bank’s outlook, as well as the credit risk impact during an ALM simulation – without a lot of upfront effort on your part .

This white paper examines how SAS’ solution, the SAS Asset and Liability Management Quick Start service, can help you rapidly move through the implementation phase to get a strong return on your investment in SAS Asset and Liability Management software .

Why Is a Quick Start Solution Important?This solution allows institutions to use advanced analytics quickly, while enabling future expansion and enhancements .

It provides a high-quality, integrated risk data infrastructure that measures exposure and risk across all risk types and books of business . The cash-flow and pricing functions for all banking instruments and products are included . The modeling system allows for endless extension and customization of the analytics . The user-friendly reporting framework allows business users to develop their own reports or customize existing reports directly using Microsoft Excel .

Key features of the SAS Asset and Liability Management Quick Start service:

• ProvidesapredefinedimplementationscopeforALM,liquidityriskandfundtransfer pricing .

• DeliversapreconfiguredversionofSASRiskManagementforBankingAssetandLiability Management, which is designed to support advanced analytics, stress testing scenarios, pricing, and external and in-house reporting for multiple areas of risk – market, credit, liquidity and firmwide .

• Providesapredefinedlandingareaforeasilyloadingbankdata,marketdataandimportant assumptions for mapping prepayment, decay rate curves and other risk factors that determine behavioral cash flows in ALM analysis .

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• Deliversout-of-the-boxreportsforALM,liquidityrisk,andfundtransferpricing.In addition to Web-based reports, there are Excel-based workbooks (and access to all underlying data) that provide extended capabilities to users for their ad hoc analysis and reporting requirements .

Analytics

Instrument coverage and pricing functions

TheSASRiskManagementforBankingsolutionconfiguredthroughtheSASAssetandLiability Management Quick Start service supports all the instrument types in a typical banking organization . The pricing functions for all instrument types are out-of-the-box ready and written in SAS .

TheSASProfessionalServicesteamcanalsoincorporatethird-partypricinglibraries or user-written functions such as:

• Consumerloans.

• Mortgageloans.

• Commercialloans.

• Timedeposits.

• Coredeposits.

• Wholesalefunds.

• Investments.

• Off-balancesheet.

Analysis

TheSASRiskManagementforBankingsolution(configuredthroughourQuickStartservice) supports the following preset analytics:

• Cashflowanalysis.

• Netinterestincome.

• Netinterestincomeatrisk.

• Economicvalue.

• Economicvalueatrisk(VaR).

• InvestmentportfolioVaR.

• Liquiditygapanalysis.

• BaselIIIliquiditycoverageratio(LCR)andnetstablefundingratio(NSFR).

• Longrun-shortrunliquidityscenarioanalysis(LCRandNSFRscenarioanalysis).

• Fundtransferpricing.

• Stresstesting.

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SAS® Risk Management for Banking: Asset and Liability Management Quick Start Service

User-defined and simulated scenarios

SASRiskManagementforBankingallowsuserstocreatetheirownscenariosandanalysis . It also supports scenarios and simulations out-of-the-box:

• MonteCarlosimulation:

» Covariance-based(investmentportfolio).

» Copulamethodologiesforaggregation(Gaussian,normalmixture and student’s t) .

» Riskfactormodel-based(economicvalueandnetinterestincome).

Note: The customer must provide historical data used to create the covariance matrix.

• User-definedscenarios:

» -300bps, -200bps, -100bps, -1bps

» +300bps, +200bps, +100bps, +1bps

» Curveinversion.

» Curvesteepener.

» Curveflattener.

» Curverotation.

» Prepaymentcurveincreaseordecrease(100bps).

» Runoffcurveincreaseordecrease(100bps).

Time Buckets

TheSASRiskManagementforBankingsolution(configuredthroughtheQuickStartservice) includes two sets of time buckets . Time buckets can be modified and additional bucketing schemes can be added based upon client-specific requirements

• TimeBucketSet1:

» 2w, 1m, 2m, 3m, 4m, 5m, 6m, 7m, 8m, 9m, 10m, 11m, 12m, 1 .25y, 1 .5y, 1 .75y, 2y, 2 .25y, 2 .5y, 2 .75y, 3y, 4y, 5y, 7y, 10y, 15y, 20y, 25y

• TimeBucketSet2(OCCstandardbuckets):

» 1m, 3m, 6m, 12m, 2y, 3y, 5y, 10y+

Hierarchies

In order to deliver the Quick Start service, a customer must provide data at the instrumentlevel.Onceimplementedthroughtheservice,theSASRiskManagementforBanking solution computes cash flow at the instrument level and will aggregate results across defined hierarchies and cross-classifications . It delivers eight hierarchy levels:

• Legalentity.

• Region.

• State.

• Businessunit.

• Product.

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• Subproducts.

• Business(neworexisting).

• Chartofaccounts(COA).

Client-specifichierarchieswillbeassessedbySASProfessionalServices.

Portfolio forecast, pipeline hedging and other hedging strategies

SAS will provide new business instruments – up to one aggregated instrument for each subproduct type – to enable balance sheet forecasting and net interest margin (NIM)calculationbasedonnewbusiness(loansanddepositsassumptions).Volume and rates are specified as inputs . Hedging instruments can be loaded as new businessinstrumentstoevaluatethehedgeeffectivenessforNIM,cashflowgapsoreconomic value . This can be also used for pipeline hedging or other balance sheet hedging strategies .

Portfolio selection

You will have the ability to create filters based on the hierarchies and perform analyses based on these filters in order to use analytics on a selected portfolio .

Models

The ALM models will run forecasts and simulations based on driver models . The three mainprovidedmodelsareinterestrate,prepaymentanddeposit.Prepaymentanddeposit models will be linked to interest rate levels .

SASRiskManagementforBankingprovidesmodelingusingeconometrictime series (ETS) . The customer can use the provided modeling to create additional models using existing data or custom equations that can be directly entered into the system.CustomerswillbeabletouseSAS/ETS® software for the development of custom models .

Interest rate models

TheprovidedALMmodelsuseaCox-Ingersoll-Rossinterestratemodelbydefault.ClientscanchooseanothermodelsuchasHull-White,Vasicek,Black-KarasinskiorCox-Ingersoll-Rand.Interestratedatawillbefittedtothemodeltoensureconvergenceduring simulation .

Othermodelscanbeusedonrequest,andratescenarioscanbeusedasinputstothesimulation, but these options are not part of the SAS Asset and Liability Management Quick Start service scope .

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SAS® Risk Management for Banking: Asset and Liability Management Quick Start Service

Prepayment models

Prepaymentmodelshavetwoparts:

• Expectedprepaymentratemodels(projectingexpectedprepaymentsbased on the current date) .

• Prepaymentratesimulation(possibleprepaymentratesattheendofthe projection horizon) .

Expected Prepayment Model

Theprepaymentmodelprovidedisbasedonpublicsecuritiesassociation(PSA). Thestandardmodel(alsocalled“100percentPSA”)worksthisway:Startingwith an annualized prepayment rate of 0 percent in month zero, the rate will increase by0.2percenteachmonth,untilitpeaksat6percentafter30months.Fromthe 30th month on, the model assumes an annual conditional prepayment rate of 6 percent.Prepaymentratesforeachloanfacilitycaneitherbecalculatedusingtheprepayment rate models, or can define maturity prepayment rates that rely on subjective perceptions .

Prepayment Rate Simulation Models

The purpose of this model is to simulate prepayment rates, which in turn contribute toportfoliovaluesimulatedstates.Youshouldprovidelookuptableswithindex/ratedifferential spreads based on instrument current rate and current market rate for each simulatedstate,whichindicatesthelevelofPSAtouse.ThelookuptableformatisflexiblebutwouldincludePSAratesforeachdifferentialspread(e.g.,0.5*PSA,1*PSA,1.5*PSA,2*PSA,etc.foreachlevelofspreaddifferencebetweencurrentinstrumentrate and market rate) .

Deposits (runoff) models

SAS works with clients to build deposit models to reflect the characteristics of the operatingenvironment.SASRiskManagementforBankinghasasubmodelingcomponent(SAS/ETS®) that has virtually unlimited model development capabilities .

SASRiskManagementforBanking(configuredwiththeQuickStartservice)comes with a linear volume model for deposits .

The provided linear volume deposit model:

• Describesvolumerunoffintermsofchangesinadepositorrisk-freerateandseasonal factors . The model is linked to changes in any single market rate during the simulation so that deposit runoffs are linked to a lagged level of interest rates . A lookup table defines the linkage between lagged market rate and runoff rates .

• Providesdecay-ratecurvesperdepositcategoriesandprovidesdecay-rate curves lookup tables based on the level of interest rates to be used during simulation analysis .

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TheSAS/ETSmodelingplatformalsoincludesmorefactorssuggestedbyeconometricanalysis and statistical significance .

Nonmaturingdepositsarecomputedusingtherepricingofthedepositratebasedonaninterestratecurveyouprovide(e.g.,atreasury,orsimilar,curve).Nonmaturingdepositsare modeled as floating rate deposits .

Fund Transfer Pricing and Profitability Analysis

The solution comes prepackaged with a matched maturity method for transfer pricing . Variouslevelsoffixedanddynamicspreadscanbeapplied,anduserscanshockspread levels from the front end .

Maturity mapping uses a choice of three methods:

• Matchedmaturitybulletfunding(maturitybased).

• Matchedmaturityweightedaveragelifefunding(durationbased).

• Matchedmaturitycashflowfunding(value-weightedfundingcurveforrespectivecash flows) .

Profitabilitycanbeanalyzedatanylevelandeachaccountcanhaveadifferentbasecurve and specified spreads .

ReportingA set of 12 reports and two Excel workbooks are provided as part of the Quick Start serviceforSASRiskManagementforBanking1:

• NetInterestIncome

• NetInterestIncomeatRisk

• LiquidityGap

• RepricingGap

• LCRNSFRScenarioAnalysis

• ProfitabilityAnalysis

• EconomicValue

• EconomicValueForecast

• EconomicValueScenarios

• InvestmentPortfolio

• Sensitivity

• FundingSources

1 Report pack sample is provided to customer for review - any customization of reports is out of scope unless agreed upon prior to engagement.

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SAS® Risk Management for Banking: Asset and Liability Management Quick Start Service

Two Excel workbook examples2:

• Thefirstworkbookprovidesadetailedviewofanalysisresults.

• ThesecondworkbookprovidesanexamplecustomizedworkbookusingMicrosoftVisualBasicforApplications(VBA)forspecificanalysis.

Example 1

Example 2

2 Workbooks are provided as examples to provide the customer with detailed access to raw data.

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Data LoadingOursolution,configuredthroughtheSASAssetandLiabilityManagementQuickStartservice, comes with:

• Predefinedlandingzone.Thelandingzoneistheentrypointforthesolution and customers provide data files in the landing zone format .

• Solutionsdatamart.Thesolutionsdatamartisseminormalizedandspeciallydesigned for the SAS analytics engine .

• Reportingmart.TheoutputoftheSASanalyticsenginewillbestoredinthereporting mart .

Alldataintegrationflowsarepreconfigured.SASProfessionalServiceswillprovidedetailed requirements and knowledge transfer to customers .

SASProfessionalServicescanworkwithyoutointegratetheSASsolutionwith third-party data providers .

DescriptionSheet contains list of all in scope instruments for ALM - X

Sheet contains Instruments covered under each flat file

Cashflow Instrument Flat file covering Fixed Income securities

Cashflow Account Flat file covering Banking book products

Forward Rate Agreement Flat file covering FRAs products

Forward Contract Flat file covering Forward Contracts products

Repo & Reverse Repo Flat file covering Repo & Reverse Repo products

Spot Flat file covering Spot products

Swap Flat file covering Swap products

Cashflow Record Flat file covering irregular cashflow Fixed Income securities

Counterparty Flat file covering Counterparty details

Risk Factor Master Flat file covering Market data details

Flat file linking instrument ID with applicable curves

Flat file covering all source to lending mapping tablesMapping Table Master

ItemProduct List (In Scope)

List of Source Flat Files

Exposure Data

Market Data

Exposure X Risk Factor

Figure 1: SAS RMfB provides tight integration with Excel, enabling users to create custom results templates for their ALM analysis that are directly linked to the solution results mart. SAS provides two sample workbooks with more than 25 worksheets.

TechnologySASRiskManagementforBankingoperatesontheseplatformtiers:

• Server.

• Middle.

• Data.

• Client.

Product ListFixed Income SecuritiesBankers Acceptance

Commercial Paper

Deposits

Deposits (CDs)

Treasury Bills

Government

Corporate Bonds

Zero Coupon Bonds

Floating Rate Notes

Repos and Reverse Repos

Bond Forwards

Forward Rate Agreements (FRA's)

Interest Rate Swap

CMO

MBS

CDO

Foreign Exchange ProductsSpot

Currency Forwards

Currency Futures

Currency Swaps

Banking Book ProductsFixed Rate Loans

Floating Rate Loans

Fixed Rate Mortgages

Floating Rate Mortgages

Credit Cards

Demand Deposits

Savings Deposits

Term Deposits

Overdraft Facilities (committed)

Line of Credit/Letters of Credit

Guarantees

Receivables

Inter-bank Loans

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SAS® Risk Management for Banking: Asset and Liability Management Quick Start Service

ThesolutionsupportsWindows,UNIX,Linux,Solaris,AIX,z/OSandHP-UXoperatingsystems.Dependingonyourportfoliosize,SASwillrecommendthehardwarerequirements.Forsmalltomidsizeportfolios,justonemachineissufficienttohosttheentire solution .

TheSASRiskManagementforBankingsolutioncanalsobehostedbyaproviderchosen by either the client or SAS .

About SASSAS is the leader in business analytics software and services, and the largest independent vendor in the business intelligence market . Through innovative solutions, SAS helps customers at more than 65,000 sites improve performance and deliver value by making better decisionsfaster.Since1976SAShasbeengivingcustomersaroundtheworldTHEPOWERTOKNOW®

With the major focus on risk and regulatory reporting, SAS has solutions for market risk, credit risk, ALM, liquidity risk, operations risk, regulatory capital (Basel II and Basel III), economic capital and stress testing . SAS has consistently been ranked as one of the top three vendorsintheprestigiousChartisResearchRiskTech 100forthelastseveralyears.ChartisalsoplacedSASintheleader’squadrantforcredit risk management systems for the fourth straight year .

FormoreinformationregardingtheSASAssetandLiabilityManagementQuickStartservice, liquidityrisk,andfundtransferpricing,please contact your account executive or visit sas.com/contact/intro.html .

SAS Institute Inc. World Headquarters +1 919 677 8000To contact your local SAS office, please visit: sas.com/offices

SAS and all other SAS Institute Inc. product or service names are registered trademarks or trademarks of SAS Institute Inc. in the USA and other countries. ® indicates USA registration. Other brand and product names are trademarks of their respective companies. Copyright © 2013, SAS Institute Inc. All rights reserved. 106738_S112032_1013