financial risk fitness gmbh

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Design and Implementation of Customer Behavioral Models (Replicating Portfolios based on Stochastic Optimization Techniques) for Retail non-maturing Products

Prior to the project´s commencement, the banking group was busy augmenting their Group-wide funds transfer pricing (“FTP”) system and configuring the organization and business remit/ functional operation of the Group Funding Center (also a project coordinated by financial risk fitness). One key finding related to the bank´s sub-optimal economic incentives via existing FTP for raising stable long term retail deposits, thus jeopardizing the net stable funding ratio to be introduced by the local regulator along with the other Basel III requirements.

financial risk fitness identified a significant potential for improving the modeling of several non-maturing liabilities (also some important assets like credit card receivables and automobile loans under arrears prepayments) and implemented a replicating portfolio under stochastic optimization geared to minimizing the customer margin volatility while safeguarding liquidity.

As a result, the models for savings accounts and demand deposits allocated fewer resources into low yielding (short term) maturity buckets and more into higher yielding instruments. As such not only has the FTP rate for such deposits increased (as opposed to the old model) making stable deposit taking economically more attractive for branches, but (pending approval as an internal model by the regulatory authority) will likely increase the business profitability and stabilize the customer margins, enabling the bank to enhance their competitive position and eventually increase their market share.