RMA/Wharton

Advanced Risk Management Program

Asset Liability Management
Banking Book Risk
Philadelphia, PA

June 2015
Tom Haczynski

Todays Agenda
I.

Asset/Liability Management (A/LM)

3-6

II.

Interest Rate Risk (IRR)

7-40

III.

Funds Transfer Pricing (FTP)

IV.

Conclusion

V.

Discussion Topics: Current A/LM Issues

VI.

Acknowledgements

VII. Appendix

41-49
50
51-52
53
54-57

I. Asset/Liability Management
Asset/Liability Management, the management of long-term balance sheet
risks arising from core banking activities, focuses on two major areas of risk:
Interest Rate Risk
Liquidity Risk
Key Objective: Achieve the desired trade-off between risk and return
Funds Transfer Pricing
Cost & Capital Allocation Methodologies
Risk Appetite

I. Asset/Liability Management
Loans and Deposits in U.S. Banking System
Dollars in Trillions
$15

100%

$12

80%

$9

60%

$6

40%

$3

20%

$0

0%

TOTAL LOANS & LEASES

TOTAL DEPOSITS

LTD RATIO

Sourced from FRB_H8

I. Asset/Liability Management
Bank Risk Management
Financial Intermediation involves a banks use of its balance sheet to move funding
from depositors (i.e., savers) to borrowers
Savers and borrowers do not know each other; they know only the bank

Credit, Interest Rate and Liquidity Risks are caused by the differing requirements of
depositors and borrowers

Short term, floating rate $

Depositor

Long term, fixed rate $

Bank

Liquidity Risk

Interest Rate Risk

Borrower

Credit Risk
5

I. Asset/Liability Management
Corporate Governance Structure
Board Risk Committee defines risk appetite and provides oversight of risk management framework
Reviews and approves A/LM policies and limits at least annually
Receives reports on A/LM activities
Asset/Liability Management Committee (ALCO) sets strategy
Allocates limits consistent with the corporate-wide risk appetite
Includes the CEO and select members of senior management
Reviews the balance sheet position monthly (interest rate, liquidity and trading exposures)
Corporate Treasury manages balance sheet day-to-day
Identifies, measures, monitors and reports on risk position
Executes tactical transactions
Recommends strategic programs to ALCO
Market Risk Management (MRM) provides independent oversight
Recommends corrective actions to Lines of Business (LOBs) management or ALCO
Designs/approves the risk measurement methodology
LOBs own the risk profile and business performance
6

I. Asset/Liability Management
Corporate Treasury Functions

Interest Rate Risk

Management

Balance Sheet
Management &
Hedging

Liquidity Risk
Management

Funding Desk

Funds Transfer
Pricing

Investment
Portfolio
Management

Capital Market
Issuances

Rating Agency
Interaction

Regulatory
Interaction

II. Interest Rate Risk (IRR) Definition

Rate Risk in the ALM Context means
II. Interest Interest
Rate Risk
Adverse Impacts From Changes in Interest Rates On:
1

Net Interest Income

(NII)

Represents major revenue source for

commercial banks
Key area of focus for investor
community

Economic Value of Equity

(EVE)

Based on the discounted Net Present

Value (NPV) of the cash flows from all
on and off balance sheet items
Not externally reported; indication of
economic value

Current Income Focus

Extremely important concept many
have not heard about
Long-Term Shareholder Focus

II. IRR Sources & Drivers

Balance Sheet
Change in the Loan or Deposit mix
Large trades
Hedging activity
Acquisitions, divestitures
Yield Curve
Change in the absolute level of rates
Change in the steepness
Spread & Basis Risk
Impact of risk on vs. Risk off
Index used to price funding differs from index used to price asset
Option Risk
Bonds and notes with call or put provisions
Loans which give borrowers the right to prepay
Adjustable rate loans with caps or floors
Indeterminate Maturity Deposits (IMDs) give depositors the right to withdraw funds at any time

II. IRR Balance Sheet Composition

Key Concepts
Loan to Deposit ratio results from LOB activity and represents the starting risk position
Investment Portfolio, Derivatives/Interest Rate swaps and wholesale funding (FHLB borrowing,
debt issuance, etc.) are primary levers used by Corporate Treasury to adjust overall position
Off-Balance Sheet Derivatives provide non-cash alternative to managing IRR

10

II. IRR Balance Sheet Composition

Management Tools

Investment
Portfolio

Wholesale
Funding

Balance Sheet &

Interest Rate Risk
Management

Derivatives/
Off Balance
Sheet

Loan and
Deposit
Portfolios/
New
Production

11

II. IRR Balance Sheet Composition

Peer Data Q1 2015
100%

80%

60%

40%

20%

0%
WFC
Loans

PNC

BBT

KEY

Cash & Securities

RF

USB

Other Assets

COF
Deposits

FITB

CMA

STI

Borr. & Other Liabs

MTB
Equity

WFC

PNC

BBT

KEY

RF

USB

COF

FITB

CMA

STI

MTB

Loans / Total Assets ("TA")

50%

58%

64%

65%

63%

60%

66%

65%

70%

70%

67%

Loan to Deposit Ratio

73%

86%

92%

85%

80%

87%

95%

87%

84%

93%

90%

Cash & Securities / TA

37%

28%

23%

23%

25%

28%

23%

24%

23%

18%

22%

Earning Assets Ratio

87%

86%

87%

88%

88%

89%

89%

89%

93%

88%

89%

NIM

3.1%

2.9%

3.4%

3.0%

3.3%

3.2%

6.8%

3.0%

2.8%

2.8%

3.3%

Sourced from SNL

12

II. IRR Balance Sheet Composition

Peer Data Q1 2014
100%

80%

60%

40%

20%

0%
WFC
Loans

PNC

BBT

KEY

Cash & Securities

RF

USB

Other Assets

COF
Deposits

FITB

CMA

STI

Borr. & Other Liabs

MTB
Equity

WFC

PNC

BBT

KEY

RF

USB

COF

FITB

CMA

STI

MTB

Loans / Total Assets ("TA")

53%

61%

63%

65%

63%

63%

65%

69%

70%

72%

71%

Loan to Deposit Ratio

76%

88%

91%

88%

80%

90%

91%

92%

85%

97%

92%

Cash & Securities / TA

33%

25%

24%

23%

24%

25%

23%

20%

23%

17%

17%

Earning Assets Ratio

87%

85%

86%

88%

88%

88%

88%

88%

93%

89%

88%

NIM

3.3%

3.4%

3.6%

3.0%

3.4%

3.4%

6.8%

3.5%

2.9%

3.2%

3.6%

Sourced from SNL

13

II. IRR Balance Sheet Composition

Measuring the Interest Rate Gap

14

II. IRR Balance Sheet Composition

Levers to Manage the Position
Management can alter the rate sensitivity of the Balance Sheet based on desired objective.

Objective:
Reduce asset sensitivity

Approach:
Buy longer-term securities
Lengthen the maturities of loans
Move from floating-rate to fixed-rate loans
Enter into a Fixed-rate swap position

Increase asset sensitivity

Buy short-term securities

Shorten loan maturities
Make more loans on a floating-rate basis
Terminate an open Fixed-rate swap position

Reduce liability sensitivity

Attract longer-term deposits

Issue long-term debt

Increase liability sensitivity

Attract short-term deposits

Borrow more via purchased liabilities
15

II. IRR - Example

A Tale of Two Banks

Re-pricing maintains spread and price stability

16

II. IRR - Yield Curve

Potential Shapes

Normal

Inverted

Flat

17

II. IRR - Yield Curve

Actual Shapes

Inverted Curve -- 27 Nov 2006

Steep Curve -- 28 Jul 2003

5.5

Interest Rate (%)

Interest Rate (%)

6.0
5.0
4.0
3.0
2.0
1.0

5.3
5.0
4.8
4.5

10

15

20

25

30

Tenor (Years)

10

15

20

25

30

Tenor (Years)

Flat Curve -- 12 Jun 2000

Interest Rate (%)

8.0
7.5
7.0
6.5
6.0
0

10

15

20

25

30

Tenor (Years)

18

II. IRR - Yield Curve

Recent Trends
Generally, the term structure of interest rates is upwardly sloping.
Yield curves reflect expectations regarding Fed actions, growth/inflation expectations, market supply and
demand forces etc.
Yield curve movements can dramatically impact NII and EVE.
US Swap Curve (%)

Swap Curve Steepness (%)

3.0
2.5

2.0

1.5
2

1.0

0.5

4/30/2010

4/30/2014

4/30/2015

2Y vs. 5Y

2Y vs. 10Y

19

II. IRR - Yield Curve

Labor Market Trends
Surprise miss from March Payrolls exacerbated by downward revisions to January & February reported results.
April payrolls bounce back, but March was revised lower by 41k.
Downward trend in unemployment rate muted somewhat by ongoing decline in Labor Force Participation Rate.
450

64.0

8.5

63.8

8.0

63.6

7.5

250

63.4

7.0

200

63.2

6.5

63.0

6.0

62.8

5.5

400

12-Mo. Avg. Down 21k from Feb15 Peak

Monthly Change, Thousands

350
300

150
100
50
0
Jan-13

Jul-13

Jan-14

BLS Total Nonfarm Payrolls

Jul-14

62.6
Jan-13

Jan-15

12-Mo. Moving Avg.

5.0
Jul-13
Jan-14
Jul-14
Jan-15
Participation Rate, 3-Mo. Moving Avg., Percent (L)
Unemployment Rate, Percent (R)

Average

Nonfarm Payrolls

Unemployment Rate

Labor Force Participation Rate

2013

+199k

7.4%

63.3%

2014

+260k

6.2%

62.9%

Jan15-Apr15

+194k

5.5%

62.8%

Source: BLS, DOLETA, Moodys Analytics

20

II. IRR - Yield Curve

Inflation Trends
Inflation is well-below both the 2% long-term goal and 2.5% top end of FOMCs target range.
Energy prices keep headline inflation low; market-based expectations rise for the first time since Oct-2014.
Sustained low inflation expectations call into question when the timing of the first Fed Rate hike will occur.

Source: BEA, Moodys Analytics

21

II. IRR - Yield Curve

Expected First Fed Rate hike

Jan-16
Dec-15
Oct-15
Sep-15
Jul-15
May-15
Apr-15
Feb-15
Dec-14
Nov-14

22

II. IRR Net Interest Income Sensitivity

A/LM managers rely on an NII sensitivity framework to measure and monitor IRR.
Framework consists of what-if analysis of significant factors that affect NII across a
wide range of potential interest rate environments. Uses include:
NII @risk limits (at least 2 years) to ensure risk appetite is not exceeded
Business and rate scenarios to inform/educate committee members on potential impacts

It is critical to highlight:

Key assumptions and

Sensitivity of simulated NII results to the key assumptions

23

II. IRR NII Sensitivity

Process
The analysis includes the following 4 steps:
1. Forecast key inputs & assumptions:
Create base case rate scenario (i.e., interest rate curve for each period within time horizon).
Balance sheet size, new volumes, run-off and impact on composition.
Embedded options (e.g., loans prepay, deposits are withdrawn early, rate caps/floors are hit)

2. Identify major drivers:

Assets and liabilities that will re-price over different time horizons, and by how much.
Off-balance sheet items that have cash flow implications.

3. Calculate NII under the base case rate scenario.

4. Select a new interest rate forecast, re-run model and compare to the base case
Impact of technology

24

II. IRR NII Sensitivity

Accuracy & Sophistication

Process (continued)

More Robust NII

Simulations;
Static EVE
Crude
Earnings
Simulations
Multi-Dimensional
NII & EVE Scenario
Analyses

Gap Analysis

1970s

1980s

Late 80s - 90s

90s Forward

Indicators

Estimates

Estimates and
Measures

Advanced
Measures
25

II. IRR NII Sensitivity

Process (continued)
Interest Rate Forecasts
Can be defined rate paths (i.e., deterministic) or Monte Carlo simulation (i.e., stochastic)
Deterministic rate paths are generally used for NII/NI simulation.
Stochastic rate modeling is generally used in EVE analysis.

An initial scenario is run using either flat or Most Likely rates.

Shocks are modeled as instantaneous changes to current market rates, e.g. +/-100bp.
Management can be dismissive of shocks greater than 50bp because they do not often occur.
Ramps allow rates to adjust over a period of time, e.g. 20bp per month over a period of 5 months.
Ramp scenarios can maintain slope of yield curve or capture empirical slope dynamics.

26

II. IRR NII Sensitivity

Scenario Results

SCENARIO:

Down
Shock

Flattener

Most Likely

Steepener

Up Shock

Unfavorable Mix Change

Deposit Growth Lower
Loan Growth Lower
Base Case

Base Case-Most
Likely

Loan Growth Higher

Deposit Growth Higher
Favorable Mix Change

27

II. IRR NII Sensitivity

Scenario Results
Year 1 NII Sensitivity
8%
6%
4%
2%
0%
-2%

Prior
Current

-4%
-6%

28

II. IRR NII Sensitivity

Scenario Results

29

II. IRR Economic Value of Equity

Looking at IRR Another Way
Up until this point, we looked at interest rate risk as a current period issue, and
evaluated risk position based on NII changes.
Focusing only on NII can lead to sub-optimal long term value decisions.
Focusing on the Economic Value of Equity (EVE) as part of IRR management,
addresses longer term value decisions; however .........
Requires the use & understanding of additional concepts: Duration and Convexity

30

II. IRR Economic Value of Equity

Looking at IRR Another Way

EVE is the Net Present Value of all banking book cash flows
Applies a mark-to-market concept to the Banking Book
Long term focus; indication of economic value
Corresponds to future levels of NII
Limited transparency and comparability
Heavy reliance on assumptions (IMDs, prepayments etc.)
31

II. IRR Economic Value of Equity

Duration & Convexity Measures
Effective interest rate decision making involves understanding in advance how the
level of EVE is likely to change given a change in the level of interest rates
Understanding potential negative impacts allows for proactive risk management
Limit structure ensures risk exposure is within established risk appetite
Return characteristics can be combined with risk profile to optimize value

Duration and Convexity are key measures used to estimate changes in balance
sheet value due to interest rate movements
Several duration approaches exist (Macaulay, Modified, Effective etc)
All measure some form of price/value sensitivity
Cash flow characteristics, primarily existence of optionality, influences applicable approach

32

II. IRR Economic Value of Equity

Bond Theorems Applied to Balance Sheet Management
Bond prices and market interest rates are inversely related.
Bond price volatility is inversely related to the coupon on the bond.
Zero coupon bonds have the greatest volatility

Bond price volatility is directly related to maturity.

The longer the maturity the greater the price change given a change in interest rates.

Bond price volatility is not symmetrical;

The change in price is not the same for an equal increase/decrease in interest rates.
This is the effect of convexity.

33

II. IRR Economic Value of Equity

Cash Flows
Any single financial asset is a collection of future cash flows.
The value of a future cash flow changes with the level of interest rates.
Going down as rates go up
Going up as rates go down

This comes from present value calculation

PV = FV
(1 + r)
The asset and liability sides of a banks balance sheet are basically a complex
combination of multiple cash flows.

34

II. IRR Economic Value of Equity

Measuring Duration Base Case
What is the duration of a bond with a $1,000 face value, 6% annual coupon, 3 years to maturity?
Step 1 is to determine cashflows

Year
1
2
3

Cashflow
$60
$60
$60

$1,000
Price

6%
Factor
0.9434
0.8900
0.8396
0.8396

DCF
$56.60
53.40
50.38
$160.38
$839.62
$1,000.00

Year
1
2
3
3

Wtd. CF
$60
$120
$180

$3,000
0.8396
Time-Weighted cashflows

Only three interest cash flows and

one principal cash flow were
required for this example.
Determining the cash flows for
balance sheet items where:

Step 2 is to determine weighted cashflows

6%
Discount
Factor
0.9434
0.8900
0.8396

Simple example illustrates the

number of calculations required to
determine results for just one bond.

Wtd. DCF
$56.60
106.80
151.13
$314.53

clients have the option to

prepay,

$2,518.86
$2,833.39

multiple rate paths are needed,

contractual maturities are

much longer,
.... is significantly more challenging!

Step 3 determines duration

2.833
35

II. IRR Economic Value of Equity

Sensitivity Analysis Example #1
What happens to the bond value and duration when market rates INCREASE?
Step 1 is to determine cashflows

Year
1
2
3

Cashflow
$60
$60
$60

$1,000
Price

7%
Factor
0.9346
0.8734
0.8163
0.8163

DCF
$56.07
52.41
48.98
$157.46
$816.30
$973.76

Decrease in value of ~2.6%

Step 2 is to determine weighted cashflows

Year
1
2
3
3

Wtd. CF
$60
$120
$180

Market Rates +100bp

7%
Discount
Factor
0.9346
0.8734
0.8163

$3,000
0.8163
Time-Weighted cashflows
Step 3 determines duration

Wtd. DCF
$56.07
104.81
146.93
$307.82
$2,448.89
$2,756.71
2.831

Duration declined fractionally .002

36

II. IRR Economic Value of Equity

Sensitivity Analysis Example #2
What happens to the bond value and duration when market rates DECREASE?
Step 1 is to determine cashflows

Year
1
2
3

Cashflow
$60
$60
$60

$1,000
Price

5%
Factor
0.9524
0.9070
0.8638
0.8638

DCF
$57.14
54.42
51.83
$163.39
$863.84
$1,027.23

Market Rates -100bp

Increase in value of ~2.7%

Step 2 is to determine weighted cashflows

Year
1
2
3
3

Wtd. CF
$60
$120
$180

5%
Discount
Factor
0.9524
0.9070
0.8638

$3,000
0.8638
Time-Weighted cashflows
Step 3 determines duration

Wtd. DCF
$57.14
108.84
155.49
$321.48
$2,591.51
$2,912.99

Duration increased fractionally .003

2.836
37

II. IRR Economic Value of Equity

Duration & Convexity of a Financial Instrument

The Value Curve of a financial instrument or portfolio

describes the ACTUAL value given a level of interest rates.

The Value Curve is determined by a full revaluation

methodology, which is extremely time-intensive.

The majority of the change in the Value Curve can be

estimated by the following mathematical equation:

Value
Curve

Value
Duration
Contribution

Initial Value
New Value
estimated by
duration
alone

(Value)
Value = (Duration * Rates + * Convexity * Rates)
Actual
New
Value

Convexity
Contribution

1st term is Duration the linear component of value change

Value/Rates relationship is described by the line tangent to

the Value Curve
Good approximation for small changes in rates

Interest
Rates

(Rates)

2nd term is Convexity the non-linear component of value change

Necessary for large changes in rates

38

II. IRR Economic Value of Equity

Key Rate Duration (KRD)
KRD breaks out exposures along the various points of the yield curve.
KRD is used in estimating EVE value changes given non-parallel changes in the yield curve.
Based on DV01 (i.e., dollar value of a basis point), a 1bp parallel shift in rates (e.g., 2.01% vs. 2.00%)
results in an EVE change of ~$4.0MM.
EVE is highly assumption dependent, especially those related to IMDs.
KRD (years)
7.0

Key Rate Duration (years)

6.0
5.0
4.0

EVE if rates

3.0

EVE if rates

2.0
1.0
0.0
(1.0)
(2.0)

DV01 ($MM)
KRD (years)

Total
$4.0
2.10

3m
$0.8
0.41

1yr
$0.6
0.29

2yr
$1.7
0.89

3yr
$2.5
1.30

5yr
$2.2
1.13

7yr
($0.6)
(0.32)

10yr
($1.8)
(0.96)

15yr
($0.9)
(0.47)

20yr
($0.0)
(0.01)

25yr
($0.2)
(0.11)

30yr
($0.1)
(0.03)

39

II. IRR Economic Value of Equity

Optimizing NII & EVE
EVE

NII

Illustrative example above highlights the trade-offs between NII and EVE in managing IRR.
Shape of EVE and NII curves will be a function of several factors including: asset or liability
sensitivity, duration and convexity profiles, basis risk, yield curve risk etc.
Key is to understand the unique risks and priorities of your institution.

40

III. Funds Transfer Pricing (FTP)

Overview:
Reporting Levels
Why Value Cash Flows Internally?
Transfer Pricing Examples
Embedded Interest Rate and Liquidity Concerns

41

III. FTP Understanding Profitability

Organization

GAAP Based Reporting

LOB
Geographic

Customer

Portfolio

We need to
understand the
profitability of
each layer
beneath the
Organization
level.But how?

Product

42

III. FTP Why Value Cash Flows Internally?

Identifies the cost or opportunity value of funds
Enhances asset and liability pricing decisions
Separates credit risk from interest rate risk
Enables the profitability measurement of various products

43

III. FTP Valuing Cash Flows Internally

Schematic

44

III. FTP Estimating the Transfer Rate

Primary objectives of FTP are to create economic transparency of product economics and
remove IRR from the LOBs.
Matched-term funding rate is most commonly used FTP methodology.
The majority of banks calculate rates at the instrument level (vintage level for IMDs).
A liquidity premium (institution-specific credit spread) can be added to the swap curve to derive the
FTP curve for the organization.
Option premiums are added to capture customer behavior.

Practices Differ By Country As Well

Developed market banks have adopted FTP based off the market funding curve to capture duration
risk, which is then overlaid with a liquidity premium to adjust for liquidity life of asset/liability
Some emerging markets banks use FTP as a tool to change balance sheet composition and make
frequent manual adjustments

45

III. FTP Process Overview

Required methodology to determine more granular level of profitability
The primary business of Banking is Lending and Deposit Gathering
We borrow from customers, paying them interest
We lend to customers, charging them interest
We make money on the difference (i.e., net interest spread)

Top of House View

Corp.
Loan Interest Income
Deposit Interest Expense
Net Interest Income

5%
1%
4%

Corp.
Loan Interest Income
Deposit Interest Expense
Net Interest Income

Loan Interest Income

FTP Charge for Funds
FTP Credit for Funds
Deposit Interest Expense
Net Interest Income

Loan
5%
1%
4%

Deposit
5%
5%

1%
-1%

Corp.
Loan
Deposit
FTP Center
5.00%
5.00%
0.00%
3.50%
-3.50%
0.00%
3.50%
-3.50%
1.00%
1.00%
4.00%
1.50%
2.50%
0.00%

Product View without FTP:

Loans make money while Deposits
lose money

Product View with FTP:

Loans make money and Deposits
make money (assuming identical
tenors)

46

FTP Illustration

III. FTP Illustration

Asset Yield (5.0%)

Asset
Spread

Mismatch
Spread

FTP Charge (3.5%)

FTP Credit (3.0%)

Net
Interest
Spread

Liability
Spread

Int. Expense (1.0%)

FTP MCOF
Curve
Asset Spread + Liability Spread + FTP Mismatch Spread = Net Interest Income (NII)

47

III. FTP Variable Rate Example

Term Liquidity Premiums (TLP):
Assets and liabilities that re-price periodically over their life receive a liquidity charge or credit based on the term.
The TLP is based on what the market would charge to obtain variable rate funding for a term longer than the repricing frequency of the borrowing.
For Example: Floating-rate, bullet loan with 3-year maturity indexed to 1-mo. LIBOR
Loan transfer-priced as term to re-pricing
Floating Rate Cost of Funds: 1-mo. LIBOR + 3-year Liquidity Premium
The marginal cost of funds on a floating rate basis is typically LIBOR plus organizational credit
spread (a.k.a. Liquidity Premium Charge).
Therefore, if on date of pricing:
1-mo. LIBOR =
+ 3-year Liquidity Charge =
All-in FTP rate =

0.25%
0.75%
1.00% (at inception)

During the life of the loan, the base FTP rate changes as the loan re-prices
Liquidity Charge does not change for the loan (i.e., it is assigned at origination and stays fixed
for the life of the loan)

What rate do we need to charge to earn a 2% spread?

48

III. FTP - Summary

Enables multi-dimensional (LOB, product, HH, etc.) profitability analysis
Allows for comparable profitability measurement of assets and liabilities across LOBs
Removes IRR and Liquidity Risk from the LOBs:
IRR arises when there is a difference between the re-pricing characteristics
Liquidity Risk occurs when there is a difference in the timing of cash flows
Forms the foundation for optimal pricing of asset and liability products

49

IV. Conclusion
An effective A/LM process creates value by optimizing the risk/return tradeoff.

Client
needs
Regulatory

Product mix

Liquidity

Infrastructure
Capabilities
Interest
Rate Risk

50

V. Discussion Topics
Business Cycle & A/LM
Peak
2007

Recession
2008-09

Trough to slight
improvement
2010-2013

Expansion
2014 ?

High loan demand &

strong asset quality.

Weak loan demand &

asset quality problems

Weak loan demand

credit problems
diminishing

Strengthening loan
demand & improved
asset quality.

High interest rates

flat yield curve

Short-term Rates drop

quickly steeper yield
curve

Low Rates steep

yield curve

Rates slowly increase

Yield Curve becomes
flatter

Low Liquidity due to

loan funding

Cash increases Calls &

Prepayments
accelerate

Awash with cash in

a low rate
environment

Slowly lose liquidity &

funding becomes more
expensive

High interest rate risk

Liability sensitivity
causes margin
compression

Banks benefit from

Liability sensitivity

Liability sensitivity
pays off

Short rates increase

Banks benefit from
being Asset Sensitive

51

V. Discussion Topics
Top-10 List
1. Deposit Competition (i.e., once rates rise!)
2. NIM Compression
3. Interest Rate Views
4. Regulatory:
LCR, NSFR, QRM, OLA, DFA165
5. Board of Directors Communication
6. Integrated Processes:
CCAR, CLAR, Living Will, LCR, NSFR
7. Model Risk (prepayments, deposit betas)
8. Economic Downturn / Exogenous Shock
9. Investment Portfolio Strategies
10. Volcker Rule Compliance
52

VI. Acknowledgements

Tony Santomero

Citigroup

Aleem Gillani

SunTrust Bank

Al Kolesar

SunTrust Bank

53

VII. Appendix

54

Interest Rate Risk Sensitivity Analysis

Base Case

55

Interest Rate Risk Sensitivity Analysis

Down Rate Shock

56

Interest Rate Risk Sensitivity Analysis

Up Rate Shock

57