Effective Product Control

CHAPTER 17Balance Sheet Substantiation and Analysis

For many years, when capital and liquidity were cheaper and more plentiful in the markets, a bank's balance sheet was the running mate of the P&L. The size and construction of a bank's balance sheet was somewhat important, but it wasn't high on the desk's list of priorities. The main function that monitored the balance sheet was Treasury and the trading desks preferred to devote their time to managing their P&L performance.

Since the global financial crisis (GFC) however all this has changed. The balance sheet has climbed out of the shadows and into the spotlight to get the attention it deserves. Banks are now very concerned with the size and shape of their balance sheet, as an oversized and inefficient balance sheet can result in higher capital requirements, government fees and ultimately a lower P&L. These days, the desk's performance is not only scrutinized from a P&L perspective, but also from a balance sheet perspective.

It is with this in mind that product control can provide real value to the bank, through assisting the business in maintaining an optimal balance sheet. Not only this, but as changes in the balance sheet generate the P&L, it is vital that the balance sheet is substantiated. In this chapter, we will look at the typical controls a bank will maintain over its balance sheet.

Substantiating the Balance Sheet

Balance sheet substantiation can be viewed by some as a mind numbing tick and bash exercise and if ...