Finalyse offers a comprehensive range of services in ALM / EWRP, including:
Raising funding and investing the proceeds in the right volumes and under the right financial conditions are separate but complementary aspects of the business of a Bank. Exactly the same applies to writing insurance contracts and investing the premia in the context of insurance.
Co-ordinating the funds/premium gathering and investment activities is a central function that ensures that the best possible synergy is achieved when the Asset and Liability sides of the balance sheet are brought together.
This function, ALM, covers many things in both contexts:
- Pricing is the front line of risk management. Setting margins on assets and liabilities through transfer pricing methodologies that not only make sure that expected losses and the cost of hedging are included in margins but also sends the right signals to the business units responsible for gathering liabilities and investing capital,
- Representing future cash flows taking into account customer behaviour, embedded options and detailed contractual features on both sides of the balance sheet is essential to having a clear picture of the economic value of existing engagements,
- Simulating the impact on Value and Earnings of changes in the various market risk factors is essential to the quantification of risk (information that can be integrated into an Economic capital view) and also to the selection of appropriate market risk mitigation strategies thorough hedging, diversification and securitisation/reinsurance strategies,
- Determining the appropriate investment horizons in the light of liability profiles ensures that the balance sheet mismatch that needs to be managed actively can be kept to the a level acceptable to management.
Economic Capital (EC) is the amount of fungible assets a business needs to meet a certain target maximum probability of "economic insolvency". This latter is defined as the point at which the fair value of liabilities exceeds that of assets.
Measuring EC involves the quantification of the distribution of the fair value of different parts of a business under variations in the risk factors that influence the value.
These risk factors can be grouped into several classes such as market, credit, underwriting, operational, business and liquidity.
Identifying pragmatic methodologies for estimating the variability of these risk factors and translating that into the distribution of "portfolio values" lies at the core of a good EC framework.
Aggregating the EC requirement due to the separate risk classes across activities to take into account the risk compensation between them is another area of methodological choice. Equally important is establishing how the aggregate EC requirement can be allocated back to the different risk factor classes and business units in order to enable management to make strategic investment and optimisation decisions.
Underpinning all of the methodology is the need for robust and pragmatic technical infrastructure: good data warehouse designs, clear agreements on the information that needs to be supplied by each activity, effective aggregation tools and timely and transparent reporting systems.
With its financial modelling and IT technical know-how allied to many years of practical experience, Finalyse is uniquely placed to help its clients ensure the effective transition from conceptual framework to working systems.
Interest Rate Risk and Earnings at Risk applications for the Banking Book
With the Global Financial crisis and the new restrictions imposed on trading activities, more and more financial institutions are refocusing on their core business. Consequently, for the financial sector, the banking book of banks and insurance companies remain more than ever at the heart of market risk management.
Traditionally, the Asset & Liability Management (ALM) department has been responsible for the management of interest rate risk and liquidity risk of the banking book. This support department is actually crucial by continuously providing a good overview of the profitability of all asset and liability items in its scope (loans, mortgage loans, savings, deposits, etc.).
Starting from the basic breakdown of cash flows for both asset and liabilities items, ALM activity used a set of advanced tools and required a diversified expertise in order to manage specific issues such as hidden option, modelling for non-maturing products, formulation of hypotheses relying on expert judgement or pricing option, amongst other. Most of the time, risk managers based their monitoring on an economic view by using risk measures such as Basis Point Sensitivity values or full revaluation process.
Furthermore, in the toolkit of ALM managers, Earnings at Risk measures (E@R) are becoming increasingly important in order to steer the overall result of the balance sheet. While traditional measures of risk in ALM are focused on the economic value, the approach of E@R differs in the way that it is an income perspective where the profit and losses can be allocated to a time period.
Whatever the risk measure used, ALM activity is in line with the general trend of complex modelling (from deterministic to stochastic) combined with dynamic perspective (new production, rebalancing effect, etc.).
How can we help?
Finalyse has extensive experience in ALM projects in major financial institutions and with small and medium-sized banks. We stay in the frontline of methodological developments and regulatory constraints (e.g. the Interest Rate Risk of the Banking Book). One of our consultants talks about a project:
"One of our client in the banking sector had a serious problem with the risk of prepayment on its mortgage loans portfolio; the modelling of the mortgagor behaviour was much too basic and the losses incurred were not under control. By combining our modelling, pricing and ALM experience, we succeeded to improve their model by identifying the drivers and to monitor the risk on a regular basis. The outcomes entailed a better risk management by a more accurate assessment of the costs and thus, a much more efficient hedging strategy.”
In addition, Finalyse can help in the design and implementation of your VaR and E@R applications whether you are at the start or at the end of the process.
Liquidity risk is the risk that an institution has insufficient liquidity to meet its obligations as they fall due.
These obligations are varied, and their nature depends heavily on the business model of the bank, which has to meet them under business-as-usual view and in stressed conditions. As there is uncertainty around some funding sources as to the time when they fall due, it is important to have a dynamic view to see how the bank can fund new business in coming months.
Finalyse provides risk advisory services to Financial Institutions from business consulting to system implementation, support and ongoing custom care on the topic of the liquidity risk.
These services range from the assistance on liquidity regulatory requirements to the design and implementation of liquidity reports, either for management or regulatory reporting purposes.
In between, Finalyse has also participated to the implementation of dedicated platforms aiming at gathering, collecting and processing all relevant data at the most granular level, in order to build and support monitoring and reporting processes on all related liquidity measures and ratios (a.o. LCR and NSFR).
As it is a vital part of the liquidity risk management toolkit, Finalyse can help design a sound stress test approach and implement the related stress test engine, with a view on the desired disclosures.
With the experience accumulated on different ICAAP files set-up, we are able to assist and support in the ILAAP context.
Our professionals have a mix of risk and financial experience as well as practical knowledge of how to turn theory into practice.
How Finalyse can help
In this context, Finalyse can offer the following services:
- Analysis and set-up of business requirements thanks to financial risk management and regulation expertise
- Translation of business requirements into functional and technical specifications
- Data processing and modelling
- Design and production of related reports and dashboards
- Project management and follow-up of the whole implementation phase
Risk and Performance scorecards
A business strategy is a set of high-level goals for improving the performance of a business. It is often compared to a road map indicating where the company should be at a certain point in the future.
Maps, however, are useless on their own. For the business to arrive at its desired destination on time and in the most efficient way possible it is essential to have road signs, speedometers, petrol gauges and, potentially, a whole range of other indicators.
Moreover, it is necessary for the management of a company to be able to interpret these indicators easily and to be able to check them at the right frequency.
The development of optimal "dashboards" is therefore a matter of extreme importance in a competitive business environment.
There has been an explosion in the area of Business Intelligence in tools and techniques for the implementation of such dashboards.
A similar explosion in terminology has also added to the challenge of designing the most effective solutions.
These represent the executive summaries that bring together "Key Performance Indicators" that state, succinctly, the progress the business is making towards the strategic goals.
Key Performance Indicators
KPIs are the high-level measures of performance such as "sales volume", "costs", "economic capital requirement", "geographical diversification" in terms of which the global strategy is formulated. KPIs are generally delivered at board meetings at a frequency consistent with the decision process.
These are reports that allow the fine-tuning of performance in order to keep the KPIs within the limits management has prescribed in order to promote the achievement of their targets. Dashboards need to be richer than scorecards and also need allow for analysis of the figures that contribute to the KPIs. This analysis is necessary in order to be able to take timely action at a relatively high frequency.
These are the basic figures, the atomic constituents of performance figures that are used to generate the KPIs. If the required performance metrics are not all identified and defined exhaustively at the beginning of a scorecard project, then the project risks failure and management may be left without one or more of the essential KPIs or at the very least, with a KPI that is unreliable.
Clearly, a thorough analysis, starting with the business requirements that the scorecard is supposed to meet and continuing all the way down the information chain to the raw data on business activities in the operational data sources, is fundamental to the success of such a project.
Finalyse combines a thorough knowledge of the Financial Sector with high quality business, functional/quantitative and technical analysis and design skills to help financial institutions to deliver high quality, actionable information to top management on risk and performance.