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Disclaimer - Terms and Conditions
Disclaimer - Terms and Conditions
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PRODUCTS - ALMAN (ALM/Risk Department)
How ALMAN assists the Liquidity Risk manager
Liquidity risk (the potential for loss to the organization arising from either its inability to meet its financial obligations as they fall due or to fund increases in assets without incurring unacceptable loss) is considered one of the major risks for financial institutions.
The primary responsibility of the Liquidity Risk Manager is therefore to maintain adequate liquidity at all times, so that the bank is in a position (in the normal course of business) to meet all its obligations, to repay depositors, to fulfill commitments to lend and to meet any other commitments it may have made. Further, he/she must plan for unforeseen events that may cause a liquidity crisis.
ALMAN enables the liquidity risk manager to identify potential liquidity risk and areas of vulnerability by providing the following functionality:
The primary responsibility of the Liquidity Risk Manager is therefore to maintain adequate liquidity at all times, so that the bank is in a position (in the normal course of business) to meet all its obligations, to repay depositors, to fulfill commitments to lend and to meet any other commitments it may have made. Further, he/she must plan for unforeseen events that may cause a liquidity crisis.
ALMAN enables the liquidity risk manager to identify potential liquidity risk and areas of vulnerability by providing the following functionality:
How ALMAN measures Liquidity Risk
Liquidity risk is measured by conducting an analysis of net funding requirements, which is determined by analyzing future cash flows based on the assumptions on changes in rates and the expected behaviour of assets and liabilities, as well as off balance sheet items.
In its essence, the “engine room” of ALMAN is the modelling of these future cash flows. By running (an unlimited number of) different rate view / strategy / behavioural combination models, ALMAN evaluates this under different scenarios, namely “going concern”, business as usual and stress situations. Each scenario will consider significant positive and negative liquidity movements that could occur.
ALMAN not only measures and reports on mismatches between assets and liabilities on a contractual basis (to meet Regulatory reporting requirements). In practice, current accounts and savings deposits are not withdrawn the next day and overdrafts are not repaid on demand. ALMAN caters for this “real life” situation by also calculating these mismatches on a ‘business as usual’ basis. The ‘business as usual’ mismatch calculation predicts future cash flow patterns based on past behavioural patterns as specified by the user.
In addition to mismatch calculations, ALMAN allows the user to calculate ‘net liquid assets’, which is the difference between liquid assets and volatile liabilities within the portfolio. (This is referred to as the liquidity gap.)
ALMAN offers facilities for stress testing, in order to assess the extent of the bank’s exposure to liquidity risk. To determine net liquidity under stressed conditions, liquidity outflow is quantified for each scenario, and cash inflows to mitigate liquidity shortfalls are identified. This also assists the Liquidity Risk manager in assessing adequacy of liquidity cushion and contingency funding.
Sound liquidity risk management requires that sources of available funds must be diversified in order for the organisation to capitalize on changes in market conditions and to be more resilient in tight market conditions. ALMAN allows for the modelling of any combination of funding sources, to see the effect of different funding mixes.
ALMAN ensures that modelling of future cashflows meet all existing (or perceived future) regulatory requirements in terms of minimum liquid asset holdings.
ALMAN enables continuous monitoring of liabilities (e.g. deposits from the public) to assess the bank’s ability to raise funds. Future cash flow projections calculate and highlight the funding shortfall or surplus (for each month in the modelling horizon) that will result from each modelling scenario.
ALMAN offers the following standard Liquidity reports:
Liquidity risk is measured by conducting an analysis of net funding requirements, which is determined by analyzing future cash flows based on the assumptions on changes in rates and the expected behaviour of assets and liabilities, as well as off balance sheet items.
In its essence, the “engine room” of ALMAN is the modelling of these future cash flows. By running (an unlimited number of) different rate view / strategy / behavioural combination models, ALMAN evaluates this under different scenarios, namely “going concern”, business as usual and stress situations. Each scenario will consider significant positive and negative liquidity movements that could occur.
ALMAN not only measures and reports on mismatches between assets and liabilities on a contractual basis (to meet Regulatory reporting requirements). In practice, current accounts and savings deposits are not withdrawn the next day and overdrafts are not repaid on demand. ALMAN caters for this “real life” situation by also calculating these mismatches on a ‘business as usual’ basis. The ‘business as usual’ mismatch calculation predicts future cash flow patterns based on past behavioural patterns as specified by the user.
In addition to mismatch calculations, ALMAN allows the user to calculate ‘net liquid assets’, which is the difference between liquid assets and volatile liabilities within the portfolio. (This is referred to as the liquidity gap.)
ALMAN offers facilities for stress testing, in order to assess the extent of the bank’s exposure to liquidity risk. To determine net liquidity under stressed conditions, liquidity outflow is quantified for each scenario, and cash inflows to mitigate liquidity shortfalls are identified. This also assists the Liquidity Risk manager in assessing adequacy of liquidity cushion and contingency funding.
Sound liquidity risk management requires that sources of available funds must be diversified in order for the organisation to capitalize on changes in market conditions and to be more resilient in tight market conditions. ALMAN allows for the modelling of any combination of funding sources, to see the effect of different funding mixes.
ALMAN ensures that modelling of future cashflows meet all existing (or perceived future) regulatory requirements in terms of minimum liquid asset holdings.
ALMAN enables continuous monitoring of liabilities (e.g. deposits from the public) to assess the bank’s ability to raise funds. Future cash flow projections calculate and highlight the funding shortfall or surplus (for each month in the modelling horizon) that will result from each modelling scenario.
ALMAN offers the following standard Liquidity reports:
| • | Monitoring withdrawals and customer behaviour |
| • | Identifying unexpected outflow of funds |
| • | Taking cognisance of unrecoverable loans and advances when projecting future cashflows |
| • | Identifying unexpected increases in loans and advances |
| • | Highlighting lack of funds inflow from counter parties |
| • | Modeling (and thereby measuring the impact and effect of) diverse sources of funding |
| • | Determining the dependence on large depositors (concentration risk) |
| • | Establishing the appropriate amount of liquid assets for use in a liquidity crisis |
| • | Ensuring that the balance sheet is not excessively weighted with illiquid assets |
| • | Monitoring the potential liquidity impact of off-balance sheet activity |
| • | Liquidity need report |
| • | Liquid asset composition report |
| • | Capital adequacy report. |
Furthermore, by virtue of the fact that all modelling results are stored in its database, ALMAN allows the Liquidity Risk manager to create an unlimited number of user-defined reports using its powerful report writer.
Examples of reports that can be generated using this facility:
Examples of reports that can be generated using this facility:
| • | actual cash flows against budget |
| • | performance against limits |
| • | liquid assets held per prudential requirements |
| • | additional liquid assets held |
| • | ratio of liquid assets to demand deposits |
| • | ratio of non-performing assets to total assets |
| • | ratio of short term demand deposits to total deposits |
| • | ratio of contingent liabilities for loans to total loans |
| • | ratio of pledged securities to total loans |
By defining his / her own reports in the ALMAN report writer, the Liquidity Risk manager can create a report suite that will serve as early warning monitor for liquidity concerns such as:
| • | Concentrations in a particular portfolio of assets or liabilities |
| • | Deterioration in asset quality |
| • | A decline in earnings performance or projections |
| • | Funding cost increases |
| • | Heavy cash withdrawals |
| • | Transaction size reductions |
| • | A large off-balance sheet exposure |
By virtue of the fact that an unlimited number of future scenarios can be modelled in ALMAN, stress testing can be conducted to assess the ability of the bank to withstand stressed liquidity conditions and to determine how it will cope in such a situation. This allows for identification of expected losses and assessing the impact of unlikely but still plausible events. Stress testing in ALMAN allows for any (user-specified) upward and downward basis point rate shock. Stress tests can also be performed to measure the effect of any (user-specified) reduction in deposit base.
ALMAN’s “what-if” scenario modelling facilities can also model the effects of different potential sources of funding available, e.g.
ALMAN’s “what-if” scenario modelling facilities can also model the effects of different potential sources of funding available, e.g.
| • | deposit growth |
| • | lengthening of maturities of liabilities |
| • | cash injections |