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Modeling |
ALM Consulting | Modeling BRS created its proprietary ALM modeling software specifically for commercial and savings bank applications. Less a single model and more a system of sophisticated modules, our ALM software was designed to efficiently handle an enormous level of throughput, yet be highly adaptive to the needs of a broad spectrum of financial institutions, from the small to the large, from the straightforward to the highly sophisticated. This is what enables us to model literally hundreds of individual financial institutions, each with a level of customization that rivals and often exceeds the large-scale, internal models. • The Purpose of Our Model Our model was designed for one overriding purpose: to look forward and identify opportunities within your balance sheet where changes in mix will increase optimization, and will materially improve profitability without creating excessive interest rate risk or liquidity risk. This information gives us an objective, scientific vantage point from which we can observe your bank, and make specific tactical recommendations. • The Core Structure Each institution we work with has its own database, which stores 20 quarters (5 years) of information. Initially, each bank’s database is primed with publicly available Call Report data. Although Call Report data on its own is insufficient in several key areas to perform serious analysis, it is a very robust source for balance, income, credit quality, and risk-based capital data. A series of algorithms are then applied to the Call data, which extrapolate detailed cash flows, earnings and expense rates, detailed average balances, operating expense components, and other statistics and data detail. Ultimately, the system creates from each bank’s quarterly Call Report a fully propagated financial database, ready to be augmented by greater detail provided by each client. • The Analytical Process The analysis of each institution is a 3 stage process:
This process provides the means to accurately identify a bank’s exposure to interest rate risk, and evaluate future earnings performance, the future liquidity profile, and future capital ratios under a series of alternative market rate environments. This robust analytical process creates the foundation from which we can scientifically evaluate, and suggest alternative tactics that make sense for a bank to consider. • How We Evaluate a Bank When the model completes its analysis, it intelligently searches for certain relationships, certain signs that indicate an alternative strategy may make sense for the bank. The system then automatically simulates the appropriate alternative strategy – a reasonable, real-world shift in balance sheet mix and volume that will create increased optimization within the balance sheet, and lead to better profitability without creating excessive interest rate risk or liquidity risk. • Data Input There are 3 tiers of Input, each successively more detailed and robust than the last. Regardless of the Input Tier, the ALM system applies specific optionality such as calls, puts, prepayments, and early withdrawals to the appropriate primary portfolio. Assumptions about optionality are updated routinely to reflect the current market rate environment. | Basic Input Basic Input is the absolute minimum we require to analyze an institution. Basic Input requires minimal effort to put together, and is recommended only for the smallest and least complex institutions.
| Intermediate Input Intermediate Input offers an exceptionally very high degree of refinement to the modeling of cash flows and optionality, while still keeping input preparation time to minimum. Intermediate Input, in whole or in part, offers modeling of the various primary portfolios at the logical group level. This means that instrument characteristics (i.e. fixed rates/ adjustable indices, maturity, reset and call dates, caps, and floors) are applied at the group level. Intermediate Input is recommended for institutions with total assets less than $750 million with moderate complexity in any of the primary portfolios.
| Advanced Input Advanced Input offers the ultimate in analytical refinement and control. Advanced Input, in whole or in part, offers modeling of the various primary portfolios at the instrument level. This means that instrument characteristics (i.e. fixed rates/ adjustable indices, maturity, reset and call dates, caps, and floors) are all handled instrument by instrument. Our ALM system can usually accommodate pre-existing application files provided they possess the basic required data columns. Advanced Input is recommended for institutions with total assets more than $750 million, or any institution with a high level of complexity within any primary portfolio.
• Accuracy One of the most technically challenging aspects to evaluating interest rate risk is preparing the Earnings Simulation - a one year, option adjusted, cash flow and reinvestment forecast that predicts your future earnings under a series of alternative interest rate environments. Nearly all of our observations and tactical suggestions flow from the results of the Earnings Simulation. You may base decisions on the results of the Earnings Simulation. The Earnings Simulation is the most important element of asset/liability management. It must be accurate. To ensure accuracy we Back-Test. Each year, we Back-Test the Earnings Simulation we prepared one year prior against the bank's current actual earnings. Several hundred financial institutions utilize asset/liability management information from BANK REPORTING SCIENCES. Statistically, our Earnings Simulations are accurate to within 5% of actual. |
