ALM, Interest Rate Risk and Liquidity Risk Management

The Challenge Keeps Growing

Sustainability and viability, especially during market disruptions, have become a major focus of bank regulators around the world. Meeting new requirements in a time of unparalleled interdependency and structural complexity is simply beyond the capabilities of most institutions. Aggregated balance sheet analytics do not deliver the detail needed and static assumptions make the tools incapable of responding to new requirements. Recognition that the inclusion of credit and liquidity factors is critical to an accurate forecast puts further distance between the current system capabilities and needs of the banks.

Transparency and Flexible Risk Factor Definition

To succeed, banks must have both flexibility and transparency down the individual transactions and the detailed modeling inputs and parameters. They need the ability to re-run calculations to respond to inquiries or market changes in order to understand the impact to the balance sheet and funding needs. Most importantly they need realistic and stress scenarios, including simulation of the macroeconomic factors and appropriate credit-adjustments to all valuations, simulations and net income analyses.

Analysis of Liquidity Risk

The Basel Committee has established guidelines for liquidity risk that include two minimum standards for funding liquidity that promote short-term resilience of a bank’s liquidity risk profile by assuring sufficient high-quality liquid assets to survive a stress scenario as well as longer-term resilience achieved through more stable funding sources. The short-term objective is reflected in a liquidity coverage ratio (LCR) for the bank’s portfolio, while the longer-term objective is incorporated in a net stable funding ratio (NSFR) for the portfolio.  The KRM solution supports both calculations. It allows high-quality, liquid asset instruments to be categorized as high-quality, liquid positions of various types and as Level 1 or Level 2 assets. It permits each instrument to be either designated as unencumbered or encumbered or alternatively identifies any collateral agreement encumbering the instrument and excludes the instrument. It also allows stable funding source instruments to be categorized according to the funding stability of each instrument and models the amount of funding provided by the instrument and the stability factor for the instrument. KRM can categorize assets and off balance sheet instruments requiring potential funding according to the relative market liquidity of each instrument and models the funding requirement for the instrument. Full compliance with regulatory requirements delivered standard out of the box. The KRM Risk Portal can summarize and display the liquidity risk metrics produced by the multi-period portfolio simulations performed by the KRM Analytical Engine.

Kamakura Risk Manager

Kamakura Risk Manager (KRM) completely integrates credit portfolio management, market risk management, asset and liability management, Basel II and other capital allocation technologies, transfer pricing, and performance measurement.

KRM offers:

  • Sophisticated Yield Curve Modeling
  • Flexible Risk Factor Modeling
  • Random Interest Rates Modeling
  • Arbitrage-Free Financial Instrument Valuation
  • Scenario Modeling and Portfolio Stress Testing
  • Delta-Normal, Historical and Monte Carlo VaR
  • Dynamic VaR and Expected Shortfall

Kamakura Risk Manager’s powerful ALM capabilities include user-defined multi-factor interest rate models, multiple approaches to prepayment analysis including state of the art logistic probabilities of prepayment, dynamic movements in new business, options models consistent and modern valuation techniques for valuing complex assets and liabilities such as life insurance policies, non-maturity deposits, servicing rights, et al.