Narrowing the Growing Complexity of Asset/liability Management

Article excerpt

Elevating risk managers from report-oriented "data jockeys" to individuals whose asset/liability analysis is specifically focused on current performance measurement and risk management projections to increase a financial institution's profitability is a work in progress-and music to any bank CEO's ears. An increasing number of financial industry players are relying on sophisticated technology to address interest rate volatility and the growing complexity of bank portfolios, which translates into a greater need for managing asset-based liability.

One such institution is Chase Manhattan Bank. Although the logistics of merging Chase Manhattan Bank and Chemical Bank were a significant undertaking from an organizational, infrastructural and cultural standpoint, the fusion of their risk management requirements was simplified by RADAR RiskManager, a software package developed by Risk Management Technologies (RMT). The system, which is used to manage the asset-based liability of Chase's enormous balance sheet, delivers analytical results both for specific future economic environments, and, by using Monte Carlo simulation, for a wide range of potential environments simultaneously, allowing institutions such as Chase to better manage the dynamic response behavior of their product and portfolio with full regard for future market volatility.

Analyzing a host of OUTCOMES

Using a wide variety of interest rate forecasts, the system enables risk analysts to examine the entire range of outcomes for each account to maximize a bank's profitability-marking a substantial movement away from traditional asset/liability management systems that only ensure a bank has sufficient cash reserves to meet its current liabilities.

And sources say that its analytical capabilities have made the system a crucial forecasting tool. It can store up to 44 pieces of account information for each month in the forecast period; data fields can include cash flow, average balance, ending balance, and interest cash flow, among others. "It can slice and dice the data any way you wish," says RMT chairman Dave LaCross, who currently finds himself competing against the likes of Treasury Services, Logica, and Hogan Systems.

Perhaps more importantly, RADAR preserves the linkage between the underlying raw data of an institution and the data produced as a result of its analytical process. If, for example, the results of a bank's risk analysis seem strange, a risk manager can reexamine the loan information in its original format before proceeding.

Such capabilities are vital in the wake of a merger. Chase officials needed a quick way to judge the value of its mortgage portfolio risk given the complex business climate. "RADAR's flexibility allowed us to incorporate the two banks' assets very quickly so that we were looking at a merged position from day one," says Tom Stenger, senior vice president of portfolio management for Chase Manhattan Mortgage Corp. in Edison, NJ. The system enables the bank, which holds $27 billion in mortgage loans, to better estimate its options risk, as well as implement strategic financial planning and forecasting.

Stenger says that, as a result of the system's implementation, Chase's hedging strategies have been driven by the bank's ability to obtain a better understanding of its options risk. Similarly, its operating procedures have been streamlined in an increasingly demanding regulatory environment. "RADAR has allowed us to manage our portfolio within tightly mandated corporate risk limits while providing the mortgage bank with stable income," he says.


Gone are the days when mortgages and profitability existed in parallel worlds. The union of performance measurement and risk management projection means that more time can be allocated to making decisions based on what-if scenarios that link historical performance and future market volatilities. …