BNPPARIBAS

[e-mail]iabilityManagementAlexandreADAM,HeadofFinancialModels2NewModelsforAssetandLiabilityManagementMay2008OpeningremarkAllopinionspresentedherearetheonesoftheirauthorandcannotbetakenasthoseofBNPParibas.3NewModelsforAssetandLiabilityManagementMay2008IntroductionStatementoffact=LackofALMmodellingDemanddepositconundrumIndicatormismatchbetweenInterestrateGap&RevenuesensitivityBaselIIfocusesmainlyoncreditriskandonoperationalriskandnotonALMrisksNewaxesofALMmodelsdevelopmentITstoragecapacityincreasesFinancialMarkethedgingtechniquesdevelopmentFinancialMarkethedgingproductsdevelopmentTheobjectiveofthispresentationistoshowhowALMmodelswillpossiblyevolveinthefuture.4NewModelsforAssetandLiabilityManagementMay2008SummaryNecessityandopportunitytodevelopnewmodelsinALMALMindicatorsweaknessesALMModelsweaknessesALMITdevelopmentNewALMmodelsforCustomerbehaviourAmountprojectionmodelling,wealtheffectCustomerarbitragemodelling,compensationeffectsNewproductionmodellingNewALMtechniquestodesignhedgingstrategiesReconciliationbetweeneconomicvalueandaccountingvalueALMdeltaHedgingTakinguncertaintyintoaccountConclusionRevenueBacktestingWhataboutliquidity?5NewModelsforAssetandLiabilityManagementMay2008AssetandLiabilityManagement(ALM)IntheBankingIndustry,intheInsuranceIndustryorinfinancialdirectionsoflargeCorporateCompanies,theresponsibilityofAssetandLiability(A/L)ManagersistomanagethefinancialrisksduetoamismatchbetweentheAssetsandtheLiabilities.interestrateriskliquidityriskcurrencyrisk…Inbanks,onlytheBankingBookoperationsareconcerned(theTradingbookisexcludedfromtheALMperimeter)TheearlyoriginsofAssetandLiabilityManagement(ALM)datetotheearly80sintheUnitedStateswheninterestratesroseupto15%ormore.Nevertheless,bankersalwayshadtodealwithriskmanagement.Forexample,duringtheItalianRenaissance,thejobofthebankersinFlorencewastofinancelongterminvestments(athighusuryrates)byshorttermdeposits(collectedatalowinterestrates).Thosebankswerealreadysubjecttoliquidityrisk(riskofdepositwithdrawal)andtointerestraterisk(riskofdepositrateincrease).6NewModelsforAssetandLiabilityManagementMay2008ALMindicators(1)ALMriskscomefromadisequilibriumofmaturitybetweenassetsandliabilities.Thegapsandthescheduleswillmeasurethisdisequilibrium.AscheduleofanoperationisafunctionthatprojectacrosstimetheresidualamountsofcapitalTheinterestratescheduleistheprojectionacrosstimeoftheresidualfixedrateamountsofcapitalTheliquiditygapisthefunctionthatassociatestoeachmaturitythedifferencebetweentheremainingliabilitiesandtheremainingassetsforthismaturityGapt=LiabilitySchedulet–AssetsScheduletLiquidityGapt=Liabilitiesremainingcapitalt–AssetsremainingcapitaltWhenassetsandliabilitieshavethesameschedule,theliquiditygapisequaltozero,thereisnoliquidityrisk(onthestockofoperations)Theinterestrategapisthefunctionthatassociatestoeachmaturity,theprojecteddifferencebetweenthetotalfixedrateliabilitiesremainingatthismaturityandthetotalfixedrateassetsalsoremainingatthismaturity.Theremainingassetsandliabilitiesexcludenewcustomerproductions,newcontracts…InterestrateGapt=FixedRateLiabilitySchedulet–FixedRateAssetsScheduletInterestrateGapt=FixedRateLiabilitiesremainingcapitalt–FixedRateAssetsremainingcapitaltIfthecompanyhasaninterestrategapconstantandequaltozero,thecompanywillnotbeexposedtointerestratemoves:withoutnewproduction,theincomesarethennotsensibletotheinterestratemovements.Today1month3month6month1year3years5years10yearsMorethan10yearsFixedrateloans40343433322012--Floatingrateloans4027-------Nettreasury20--------Creditlines---------TotalAssetsIRschedule100613433322012--Currentaccounts504039383628200-Liborbaseddebt4027-------Equity10101010975--TotalLiabilitiesIRschedule1007749484535250-Receiverswaps---10-10-----Cumulativeinterestrategap-16165315130-7NewModelsforAssetandLiabilityManagementMay2008ALMindicators(2)Thebreak-evenpointisoftenassociatedwiththeinterestrategap.TheInterestratebreak-evenistheaverageinterestratecostoftheassetsandtheliabilities.Thereisabreakevenforeachfuturematurity.Thebreak-evenpointallowsthepredictionofthecompanyincome(withoutnewproduction)RevenuesensitivityThesensitivityindicatormeasurestheimpactonfuturenetincomesofinterestratemovementswithasetofpossiblefuturescenarios.Sensitivitiesarecomputedaroundacentralscenariothatcouldrepresenttheforwardmarketscenarioortheinternalcompanybudgetscenario.Themaininterestincomputingincomesensitivitiesistointroducethenewproductionsintotheindicator.InterestrategapspresentastaticvisionofinterestrateriskfortheBankingBook.GapsrepresentapictureoftheBalanceSheetamountsatagivendateandtheirextinctionacrosstime.TheeconomiccapitalisanewkindofindicatordesignedtoresumetheALMrisksinonenumber:theamountofcapitaltochargeforALMrisksThecomputationisoftenbasedontheinterestrategappositionusingaVaRorESmethodologyyear1year1year1forecastyear1EvenBreakrateDDForecasted.gapIRIncomeBookIRyear1year1year1year1year1year1gaprateInterestAssetsIRFTP.AssetsFixeds