ALM Consulting |
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
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
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:
The ALM system
establishes the Bank’s current Risk, Return, and Capital profiles.
Specifically, it evaluates Liquidity, Credit Quality, Profitability,
Efficiency, and Risk-Based Capital.
performs a flat market rate forecast simulation of the balance
sheet, and constructs the resulting income statement. This
process takes into account all options resident with the balance
sheet, i.e.: calls, steps, ARM resets, conversions, and prepayments.
system performs 6 more forecast simulations – 3 with market interest
rates rising, 3 with market interest rates falling. With each
simulation, the aforesaid options automatically adjust to the given
interest rate environment.
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
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
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.
Call Report Transmission File or ASCII Export
Internal Pricing Information for Loan and
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
All Items from Basic Input
Any or all existing Internal
Cash Flow Hard-Copy Reports for the following primary portfolios:
The Annual Budget
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.
All Items from Basic Input;
Any Items from Intermediate Input;
An Excel Spreadsheet or ASCII File detailing
any or all of the following primary portfolios:
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.