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Unified Financial AnalysisRisk & Finance Lab
Chapter 14: Dynamic simulation of banks
Willi Brammertz / Ioannis Akkizidis
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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
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Example of typical chart of account
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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
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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
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Non-maturity productsSimple in appearance, difficult in praxis
>Example
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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
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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
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Forecasting equity
> Equity is a pure logical conseqence
> Equity check!
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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
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Analysis (Type III)Liquidity risk
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Analysis (Type V)Balance sheet and P&L forecast
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Forecasting NPV and sensitivity
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Forecasting NPV under MC
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Integrating market and credit risk
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Dynamic funds transfer pricing