ALM optimization

P Jeanne, Head of ALM, Natixis

21 mars 2013 2
Regulatory environment evolution
Liabilit
ies
Equity
Liabilit
ies
Equity
Liabiliti
es
Equity
Bank balance
sheet
Bank balance
sheet
Bank balance
sheet
Derivatives
A regulatory
constraint
Capital
optimization. A
complex set-up
within banks
A completely
new ALM and
strategic issue.
Main target
of the
regulation
Main
areas
impacted
How it
is seen
Monitor trading
activities
Monitor an
institution
Monitor the
financial system
itself and make it
sustainable
Basel I Basel II
Basel III
Derivatives
Derivatives
ALM becomes a strategic
tool to develop a
competitive advantage
a
s
s
e
t
s
a
s
s
e
t
s
a
s
s
e
t
s
21 mars 2013 3
Important discovery
Danger + Opportunity
Return = f ( risk )
Regulation =
-Less trading
-More capital in front of each type of activity
-Liquidity ratios
-More stress tests
-More costs ...
But to be sustainable the financial system also needs to remain profitable.
One purpose of regulation is to prevent the next financial crisis
21 mars 2013 4
Optimization : comply with the regulation and remain
competitive
Direct impacts of the regulation
Capital requirements
Depend on business, risks
Comply with LCR Ratio
30 days liquidity stress
RWA increases in
asset classes
NSFR ratio
Securing medium term
financing
Capital cost
increase
Financing cost
increase
Potential actions
Cut costs
Transfer cost to clients
Reshuffle the business model
Optimize risk with unregulated
entities
Accept lower ROE
Potential optimization :
LCR Liabilities more than one
month
LCR Assets more than one
month
Liquidity reserve
LCR Liabilities less than one
month
LCR Assets less than one
month
Off balance sheet components
Example : LCR ratio ( 1 month liquidity stress )
Deleveraging and OTD models
Technical optimization ( 32d clauses )
Collect deposit from LCR compliant
clients ( and create incentive for sales )
Optimize ALM durations
Best LCR = only slightly over 100% ?
Unless being widely over means
significantly lower financing costs
Monitor the volatility of LCR
21 mars 2013 5
Key factors of ALM optimization
KYB : Know Your Businesses :
Level of regulation in other countries
Expected ROE
Strategy of the business line ( expanding / defending a current leading position / )
Level of interconnection with other businesses
Consistent ALM conventions ( linked to statistics and pricing )
KYH : Know Your Horizon :
Short term : survive in case of strong stress ( up till what maturity ? )
Medium term : monitor the A / L mismatches and ensure le medium term refinancing
Long term : Make sure businesses are viable and profitable in the long term
Have a tranching of the balance sheet by maturity pillars
KYRA : Know your risk appetite :
Different risk profiles exist corresponding to the same MTM
Utility function is different depending on anticipations and risk/return appetite
Example of different optimal gaps :
LCR / LR
Very different cost of
carry
Global refinancing capability / Refinance assets of
this maturity + the % of longer assets not hedged
to maturity
21 mars 2013 6
ALM Trends in the financial industry
ALM departments and long Term Treasury merge
Diversification of funding sources sponsored through ALM FTP bid
rates
Complexity of some conventions concerning the assets held
Increase the rotation of Assets : Originate to Distribute models
Centralization of the carry business within groups
Monitoring of external communication about regulatory ratios
Strategic implications in the revival of a sustainable risk / return
equilibrium