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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