Asset Liability Management Optimisation

CHAPTER 5Practical Example of the Optimisation Process and Quantification of the Economic Impact under Base and Stress Scenarios

This chapter provides the reader with an illustrative analysis of the optimisation process performed for a small-sized European bank (Bank 1) and international bank based in UK (Bank 2). With this purpose, the funding costs for Bank 1 and Bank 2 have been calculated before and after the application of the optimisation model. The reduction in the overall funding cost has been driven by the rebalancing of the proportions of the funding sources. In fact, all calculations have been performed both at the single funding source level and for the whole funding base in order to see the contribution of each component to the total funding cost. The same algorithm has been applied for the asset side. The first analysed scenario is related to the business as usual situation, i.e. there is no change in the underlying model assumptions (interest term structure, liquidity profiling, and behavioural assumptions). Thus, it is a baseline scenario.

In order to assess the sensitivity of the model to a number of external and internal assumptions (herein factors) the optimisation exercise is run multiple times under different scenarios (herein sensitivity scenarios) both for Bank 1 and Bank 2. The objective of this analysis consists of the assessment of the sensitivity of the model to those factors and in understanding which factor has an impact on the model outcome and ...