seminar 17th and 18th june 2013 - finkeys · pdf file · 2013-06-20june 2013...
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FINKEYS FRANCE
Seminar 17th and 18th june 2013
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Trainer
Philippe DUCHEMIN
Independent Consultant and Trainer
Consultant : « Product Control » CNP, Paris: Insurance Group
SGCIB, Paris: Product Control
CNCE: ALM with Fermat and transfer prices
NATIXIS: P&L reconciliation
VINCI Group: Financial Reporting
CACIB, Paris: derivatives and structured credit
XRT, Paris: cash management
ABN AMRO: Amsterdam : VAR validation
AMS, London: Risk Management Consultant
Banks : Crédit Lyonnais London, Head of Middle Office
Crédit Lyonnais Paris, P&L and Risks
Chambre Syndicale des Banques Populaires: Operation Research
Training in Finance : For professionals in France: First Finance, Investance
Sciences Po: ce.com program for Banque de France
Foreign countries: Alger, Tunis, Casablanca, Lisbon, Luxembourg, Hanoi
Certification: FRM from the GARP (Global Association of Risk Profesionnals)
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Expertise
Banks - Capital Markets
Product Control, Risk Control and Financial Control
Corporates – Cash and Risk management (Treasury)
Consulting
Risk management in London and Amsterdam
Training
Financial Calculus and Financial Modeling
Internal Control
Asset Liability Management in Retail Banking
Performance Analysis for Asset Managers
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Objectives
Participation of everyone
To cover large domains of the financial world
Questioning about everything
Simplification to extract the meaning of concepts
As consultant, always find the concepts and the rational
How to position financial tools
How to leverage information technology
How to understand the current situation with respect to the past.
Adjustment between Theory and Practice
Adjustment to local / Vietnam environment
Extract from each theme what can be subject to discussion and
controversy in a challenging mode
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Vocabulary
Financial terms, acronyms are usually restricted to a limited
area: business, firms, countries...
Such as:
Interest income
Cost of Capital, Cost of Risk, Reserves
Expected and Unexpected Loss
Risk Weighted Asset
OCI: other comprehensive income
Cash pooling, netting
Working Capital
...
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Organisation
Discipline:
I speak, you listen
I illustrate, you take notes
You question, I answer
You note the major points/ideas with in mind the objective
to summarize and give back the main topics to others.
Someone translate to others
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Program for 2 days
1 - The valuation of Financial Instruments, an economic or a financial
problem.
2 - The management of FX risk for Banks and for Corporates, different
tools, different objectives.
3 - The objectives of the regulatory framework, a target for developing
countries?
4 - The importance of Asset Liability Management for retail banks.
5 - The decision making process, between economic and accounting
views.
6 - The art of forecasting in cash management: necessity and
practicability.
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
FINKEYS FRANCE
8
BANKS AND FINANCE
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
The banking system
9
Payments and Money
Risk Management Transformation
Credit Financing
Asset Management Investment
The different roles of the bank
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Société Générale - SGCIB
1 - GLOBAL MARKETS TREASURY: money markets
EQUITIES • Domestic Cash Equity • Domestic Equity Derivatives • Quantitative equity strategies • Foreign Equities • Emerging markets equities
• Research
RATES CREDIT FOREX and COMMO • Rates Credit and Forex
Foreign Exchange: spot, fwd, opt
Debt and Credit Interest Rate Derivatives
• Commodities
Commodity - agricultural
Commodity - energy Commodity - metals
2 –FINANCING
COVERAGE and INVESTMENT BANKING
• Mergers and Acquisitions • Restructuring • IPO - Initial Public Offering • Equity Capital Markets: issuance
FINANCING • Origination, structuration • Structured Products • Global Hedging • Project Finance • Trade Finance • Syndicated Credit
SGCIB : Société Générale Corporate and Investment Bank
10
MASTER RENNES
FINKEYS FRANCE
JUNE 2013 11
Controls •Product Control
•Risk Control
•Financial Control
•Collateral management
Support •Information technology
•Data management
•Marketing
•Legal
Front Office
•Booking
•Position management
•Research
•Structureurs
Middle Office
•Reconciliations FO/BO
•Valuations
•Profit and Loss
• Risks
Back Office
•Confirmations
•Payments
•Collateral
Accounting
•First Level:
confirmations, payments,
booking
•Second Level: inventory
Front To Accounting
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Controls
RISKS
ECONOMIC PROFIT AND LOSS
CAPITAL ADEQUACY
ACCOUNTS INCOME
DAILY
MONTHLY ANNUAL
IASB - IFRS
BCBS – Bale III Solvency II
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
The Trillion Page
Derivatives (2009) 450,0
CDS (before crisis) 38,6
Equity 8,7
* ISDA source
GDP (in $)
World 62,0
UE 16,1
Usa 14,6
France 2,6
DEBT
US 10,5
France 1,1
World Commerce 3,5
13
Ccy Unit: 1T = 1 trillion dollars = 1 000 000 000 000 $ = 10^12 $
Exchanges
Stocks (before crisis) 45,0
Paris 2,0
Nyse 13,0
Bonds 55,0
World Housing 140,0
Securitisation (before crisis) 25,0
MBS 7,0
Banks Capital (before crisis) 4,0
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
FINKEYS FRANCE
14
Session 01
VALUATIONS
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Topics and Problems
Objectives of this session: to ask oneself what should be
the right methodology
More importantly, define the problem
Find the different criteria to think about it
Restricted to financial instruments
The valuation problem: why, what
Framework: accounting versus risks
The valuation methods in finance: market value, accruals,
amortized cost
The role or reserves
Different theory: the cost, the equilibrium price between
potential buyers and potential sellers
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Valuations
Why?
What for?
How often?
One market, many markets?
QUOTES
Eugène Fama 1970 :
“the best estimate of a price, is the price of instantaneous market - assuming that all information, past, present, public and private is included in this price of financial assets. "
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Methods
The value of Assets and Liabilities
To get a price at some date.
This price is defined in a currency unit
Valuation methods:
Historical Methods The historical COST
For Interest Rate Products Only
Accrued Interest
Amortized cost
Market Methods Quoted prices from Market Exchanges
Prices calculated with formulas, algorithms....
How to stay coherent!
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Accrued Interest
Interest (or coupon) is taken linearly over the period.
+ + + + -
Start
Period
End
Period
Start End
360
duration partial.ateR.CapitalccrualsA
duration total
duration partial.InterestccrualsA
P&L
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Amortized Cost
Internal Rate of Return - IRR
k: initial capital, K: final capital, C: coupon
VAN
Future Value
And the Value is:
k C K+C C
0)CK()irr1(C)irr1(C)irr1(k 2t3t1t3t3t
0)irr1(
CK
)irr1(
C
)irr1(
Ck
3t2t1t
19
t1 t2
t3
N
1M
1ii )irr1(
CK
)irr1(
CVA
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Banking and Trading Book
History: the banking and the trading book.
(bcbs219: may 2012: « fundamental review of the trading book »
IFRS methods:
1. Financial Assets and Liabilities in Fair Value, with Income in the Income Statement.
2. Old to Maturity
3. Loans and Deposits, Debts
4. Other Categories
RULES:
A business model = One Price
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
French Gaap
CRD 90-15 : DERIVATIVES VALUATION
CRB 90-01 : BONDS VALUATION
21
Definition Valuation Method
A Opened Position Accruals and unrealized losses
B Micro hedging Same between both elements
C Macro hedging Accruals
D Trading Market Value( MtM)
Definition Valuation Method
1 Trading Market Value (MTM)
2 Placement Accruals and unrealized losses
3 Investment Accruals
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
IFRS 38 and IFRS 09
22
Définition Méthode
HTM Held To Maturity Amortized Cost
AFS Available For Sale Fair Value (MTM)
C Loans and Deposits Amortized Cost
Définition Méthode
1 Loans and Deposits Amortized Cost
2 Trading Fair Value (MTM) in Income Statement
3 Specials Fair Value in OCI (FVOCI)
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
More Definitions
Categories defined by the SFAS 157
1. Level 1: observable price taken in an official organised exchange
2. Level 2: non observable price, use of financial models based on observable parameters
3. Level 3: non observable price, use of financial and econometrical models based on non observable parameters (estimates)
Valuation – Level 2 and 3
Over the counter
Use of Financial Models and of Market data
Simple Actuarial methods:
NPV: Net Present Value
Static arbitrage
Complex Actuarial methods:
Option Theory: Dynamic Hedging - Analytics: Black Scholes Merton (BSM)
- Binomial models
- PDE (Partial Derivatives Equations) -Finite Differences
- Monte Carlo and Quasi Monte Carlo Methods
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Financial Theory
No Arbitrage Opportunity (NAO)
and
Complete Markets
No frictions:
- no transaction cost, no spread, no tax
- no margins, no restriction on short sales
No default risk
- infinite liquidity, unique risk free rate
- no liquidity risk, no counterparty risk
Competitive and open markets
Rational agents
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Financial Theory
Fundamental Theorem of Finance
In a complete market without arbitrage, there is a unique measure of
risk and valuation (unique martingale).
With the same hypothesis, prices are the expected (mean) value of
future cash flows defined under a risk neutral probability.
Complete Market: all assets and liabilities are reachable
No arbitrage = a price system
Complete market = a single price
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Conclusion
Price and Value?
Exchanges: demand and offer
- Use value ( economic value, amortizations)
- Exchange value
price discovery?
Historical price + margin
Accounting value vs Economic value
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Exchange Value – Use Value
Adam Smith (1776)
The things that have the greatest value in use have frequently little or
no exchange value, and on the contrary, those who have the greatest
exchange value have frequently little or no value in use.
Nothing is more useful than water, but it can buy little thing she return
for so little. A diamond, on the contrary has little use value, but a large
amount of other property may be obtained in exchange.
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
FINKEYS FRANCE
Session 02
Risk Management
FINKEYS FRANCE
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Risk Definition
Uncertainty in the Future
Measurable Random Variable
Financial Impact
FIRST DEFINITION
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Risk Definition
Uncertainty due to a lack of information:
- for future events
- NOW
SECOND DEFINITION
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Different Types of Risk
Market Risk - Financial Foreign Exchange
Interest Rates
Prices: stocks, bonds, funds, indices
Market Risk - Non financial Prices: precious and non precious metals
Prices: energy, commodities,
Liquidity
Credit Risk Default, settlement, pre settlement, rating change
Operational Risk : systems, legal, reputation
Others: weather, CO2, disasters
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Other Risks
Volatility Risk from option prices
historical volatility from time series
variance swaps
Correlation Risk between any two variables
between credit events
correlation swaps
Events Credit already mentioned : event of default
Insurance: mutualisation of risk
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Risk Factors
Risk Factors allows for the quantification of risk on a limited number of
factors: discretisation
Risk Factors are constantly changing: they are easily managed via
statistics
Risk Factors are also the axes on which positions are projected in order
to be able to measure positions
Examples:
Interest rate curve: 1j, 1weeks, 1-3-6-monts, 1-2-4-10 years
FX forward with 3 variables: one spot rate and two interest rates
In practice, 5 factors are used because rates must be interpolated
bonds: 2 choices are possible
each maturity on the curve
parallel shift, rotation and deformation
and PCA: Principal Component Analysis
34
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Regulatory - history
History Risk Management : Risk and Return framework
Regulatory
Modern approach
Links between Risk Levels and Capital
1988: Cooke Ratio in Credit Risk (Bale 1)
2004: CAD (Capital Adequacy Directive in Europe)
2008: Basel 2
2010: Basel 3
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Simple Risk Management
Objectives of RISK MANAGEMENT 1 – to cancel risk (or to decrease risk)
2 – to anticipate (forecast) and play
TWO MAJOR AREAS OF RISK
a - FX risk: risk cancelation
A FX forward cancel a future FX risk from a foreign currency denominated
bill.
b - Interest Rates: it is not possible to cancel risk
why use fixed rate? to avoid the uncertainty of the floating rate
why use floating? to avoid mtm (Mark To Market)
RULE relative to bond pricing:
I anticipate an Decrease of Rates: borrow fixed and invest floating
I anticipate an Increase of Rates: borrow floating and invest fix
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Risk Equation
Risk calculation depends on:
The measure of the Position:
=> sensitivity of the position to each risk factor The measure of the variation of the Markets
=> via statistics: standard deviation and correlation
37
Risk is equal to a potential loss on a Position in a Market with Standard Variations of Risk Factors
RISK =( POSITION) X (MARKET VARIATION)
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Sensitivities
There are 2 measures of POSITIONS:
A: flat positions: (ex 10Musd, 5M bond)(notional)
B: sensitivities: how dependant my positions/portfolio is with respect to the markets (to each risk factors)
Sensitivities are a common language in risk for positions:
Sensitivity =
price equal to 1% or 1bp (basis point=0,01%)
Price
L&P
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Sensitivities
In order to simplify calculations, the P&L is approximated via a Taylor expansion of the Valuation formula.
First order calculation: the Delta
Second order calculation: the Gamma (or convexity)
P&L = x risk factor)
P&L = x risk factor) + x risk factor)^2
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
FX Risk
The FX risk is always defined with respect to a reference currency.
The reference currency is usually the local currency or the accounting
currency.
Methodology:
FIRST: measure the risk exposure via the FX equivalent position.
SECOND: evaluate the ‘risk’ of the market: volatilities and correlations.
Note: if the volatility is null, the rate doesn’t change and the risk is null also.
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Commercial Risk
The most difficult problem is to identify the risk linked to the operations.
The FX risks depends on many factors:
First identify if any operations involved in the commercial cycle includes
foreign currency denominated prices:
- purchases: raw material you buy to produce good/services
- sales: the sales currency
- production : costs involved in the production cycle
AND
Identify if those prices are fixed or variables.
within contracts, catalogues,...
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
The Operational Cycle
Budget (forecast)
Orders
Receipt of Orders
Production
Transport
Bill
Receive Bill
Payment
Uncertainties: on payment dates
on amounts
on FX conversion
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Budget Order by
client
Bills sent Payment
Conditionnel
FX Risk Commercial
FX Risk Accounting
FX Risk
Economic FX Risk
Production Credit
Sales Accounting Payment
Accounting
Delivery delays Payment delays
Terminology
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Import and Export
Payments
Export
Sale Price
Export Risk
Payments
Import
PurchasePrice
(contrat)
Import Risk
No Risk
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Risk Management
For corporates, uncertainty larger than for banks:
More events (internal events)
Transaction amount
Initial date: the start date of the risk
Flow date: the end of the risk
The Markets (external events)
Risk factors are constantly changing
45
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
FX Risk Management
Flows are either certain or not certain FORWARD CERTAINS FLOWS
OPTION UNCERTAINS FLOWS
Options use I hedge a bill denominated in currency with a FX forward
If the client default, the forward creates an opposite risk
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Financial and Accounting Risk
Risk Identification:
Cash balances in foreign denominated currency: finance = accounting.
This is the easiest case.
Care must be taken to identify if part of this position is linked one to one to a
asset
Financial Products FX Risk
The calculation is rather straight forward for the all simple FX denominated
financial products:
FX Forward: take the discount value of the foreign future cash flow
FX Swap: 2 cases to consider:
if the spot position is already taken in the the FX position, this means
the operation has been split into a Spot and a Forward.
if not, the FX equivalent risk is equal to :( 1-DF)*foreign cash flow
FX Options: this is the delta of the option multiplied by the notional (in ccy)
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
FINKEYS FRANCE
Session 03:
The Financial Regulation
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Controls
MARKET RISKS
ECONOMIC PROFIT AND LOSS
CAPITAL ADEQUACY
ACCOUNTS INCOME
DAILY
MONTHLY ANNUAL
IASB - IFRS
BCBS – Bale III Solvency II
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Quantitative approach
• Market Risk (no change)
• Credit Risk
• Operational Risk
MINIMAL CAPITAL
REQUIREMENTS MARKET DISCIPLINE
Improvement of Disclosure
• Capital Allocation to various
risks
• Capital Structure
• Components of credit portfolio
(geography, sector …)
• Internal Rating
INTERNAL CONTROL
The regulator can request a
higher solvency ratio, depending
on the quality of:
• Risk taken: interest rate and
liquidity
• Risk Management, internal
control and reporting
• Capital Allocation
PILAR
2 PILAR
3
PILAR
1
The Three Pilars
50
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Total Capital
Minimun 8% =
Market+Credit+Operational RISKS
Market Risk
- standard model and internal model (VAR and CVAR)
Credit Risk
- standard model
- Simplified Method : internal ratings (IRB Foundation)
Complex Method: internal ratings (IRB Advanced)
Operational Risk
- Base indicators and standard model
- internal model (IMA)
Solvability Ratios
51
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Regulatory Costs SGCIB
Retail France
Credit Market Operationnal Total
Retail International
Special Financing
and Insurance
Private Banking
CIB
Proprietary
TOTAL
77.4 0 3.3 80.7
65.6 0.4 3.2 69.2
38 0 2.3 40.3
12.8 .9 3.1 16.8
65.2 12 30.2 107.4
4.2 0.6 5 9.7
263.1 13.9 47.1 324.1
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Risks
The main role of the bank: to survive
How much Capital to face major risks .
There are 2 major types of uncertainty:
Expected Losses = the mean
Unexpected Losses = the standard deviation
EXPECTED RISKS = RESERVES
UNEXPECTED RISKS = CAPITAL
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Market Risk
The Value At Risk, based on :
- A horizon
- A interval of confidence
-2,326 0 LOSSES
Area 1% Area 5%
-1,96
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
FX Risk Methods
USD 125 000
JPY 7 500 000
GBP 230 000
CHF -277 000
CAD -888 000
HKD -450 000
Calculate Risk on the following
FX position:
1 Risk with a uniform rate of 1%
2 Risk with a volatilily on each
currency
3 Risk with a volatility on each
currency a zero correlation
between currencies
4 Risk with the
Variance/Covariance matrix.
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Credit Risk
Definition of Credit Risk ?
Default from the counterparty
Settlement Risk
Payment vs Delivery
Definition of Counterparty Risk ?
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Credit Risk Measure
Credit Risk as a measure of Loss.
EAD: exposure at default
PD: probability of default
LGD: loss given default (recovery)
What about the impact of Maturity/Duration?
What about the calculation of predictable losses?
57
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Ratings 5
8
Ratings PD
(%)
Inves
tmen
t
Gra
des
AAA Aaa 0,00%
AA+ Aa1 0,00%
AA Aa2 0,00%
AA- Aa3 0,02%
A+ A1 0,05%
A A2 0,11%
A- A3 0,16%
BBB+ Baa1 0,21%
BBB Baa2 0,30%
BBB- Baa3 0,38%
Spec
ula
tiv
e
Gra
des
BB+ Ba1 0,64%
BB Ba2 0,96%
BB- Ba3 1,80%
B+ B1 3,21%
B B2 8,87%
B- B3 12,99%
CCC C 31,08%
D D 100,00%
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Coefficients:
Standard Method
S&P Rating
AAA à
AA A+ à A-
BBB+ à
BBB- BB+ à B- < B- non noté
COFACE rating 1 2 3 4 à 6 7
Soverains 0% 20% 50% 100% 150% 100%
Banks 20% 50% 50% 100% 150% 50%
Notation S&P
AAA à
AA A+ à A-
BBB+ à
BBB-
BB+ à
BB- < BB- non noté
COFACE rating 1 2 3 4 à 6 7
Corportes 20% 50% 100% 100% 150% 100%
Individuals 75%
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
IRB Foundation
IRB FOUNDATION LGD : 45%
Note PD EL UL
A+ 0,03%*(0,001%) 0,00% 1,20%
A 0,03%*(0,01%) 0,00% 1,20%
B+ 0,03%*(0,02%) 0,00% 1,20%
B 0,06% 0,00% 1,80%
C+ 0,16% 0,10% 3,10%
C 0,30% 0,10% 4,40%
C- 0,60% 0,30% 6,00%
D+ 0,75% 0,30% 6,60%
D 1,25% 0,60% 8,00%
D- 1,90% 0,90% 9,10%
E+ 5,00% 2,30% 12,00%
E 12,00% 5,40% 16,50%
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
External Fraud
Internal Fraud
Human Ressources
Clients, products &
client relationship
Assets
Systems and Procedures
Executions, processes
Negociation and Sales
CBI
Retail Banking
Commercial Banking
Payment and settlements
Agent
AM
Brokerage
Business Lines Categories Definition
All Risks, except
Market Risks
and
Credit Risks
Are excluded:
strategic risk
and
reputational risk
Operational Risk
61
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Liquidity Ratios
Intended to guard against a « run » on a bank’s
wholesale liabilities
Defined as follow:
Stock of high quality assets
> 100%
Net cash outflows over a 30d horizon
Stock of hign quality assets include:
•cash
•quality marketable securities from sovereigns,
central banks, public sector entities, and multilateral
development banks
*qualitying corporate bonds rated A to higher
•qualitying covered bonds rated A or higher
•Net cash outflows include
•*retail deposits
•* unsecured wholesale funding
•secured funding
•conduits
•contingent funding liabilities
•Implementation date: 2018
Liquidity Coverage Ratiod
Intended to promote longer term funding of assets
Defined as follows:
Available amount of stable funding
>100%
Required amount of stable funding
Available amount of stable funding include:
*Equity
*Secured and unsecured liabilities > 1y
*Retail deposits
*Term deposits with maturities < 1y
Required amount of stable funding include:
*Debt securities rated at least AA with maturities >1y
*Loan with maturities<1y
*Gold
*Commitments
*Other assets
¨Phase-in period: 2011 to 2017
Implementation date: 2018
Net Stable Funding Ratio
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Risk Control
MASTER RENNES
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JUNE 2013
CCCI: Comité de Coordination du Contrôle Interne
64
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JUNE 2013
FINKEYS FRANCE
Session 04:
Asset Liability Management
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Objectives
The objective of ALM is to maximize the value of the bank, as
defined by its level of profitability and risk.
The aim is to ensure that uses and resources in terms of
money, interest rates, maturities are consistent,
... while limiting the risk of interest rate, liquidity and currency
exchange.
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Organisation
ASSET LIABILITY
flows Financial Markets Financial Strategy
Behaviour Marketing
Income Statement: valuation & reserves
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Financial Flows
e-bank v
Etat
Individuals
Corporates
State
Banks
A,B,C
Central
Bank
Collect
through
savings
Credit to
Economy
Compulsory Reserves
« bid » « ask »
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Bank Balance Sheet
ASSET
Central Bk Acc 40
Credits 500
Interbancaires cred 300
Government bonds 230
Other assets 30
Total 1100
LIABILITIES
Capital 100
Deposits 800
Interbank loans 200
Total 1100
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
ALM program
1 Banking services and balance sheet
2 Value creation for shareholders
3 ROE breakdown
4 Profit centre management
5 Profit allocation and transfer pricing for deposits and loans
6 The capital adequacy regulation
7 Loan pricing (1): the ‘equity’ spread
8 Loan pricing (2): credit risk and credit provisions
9 Securitization
10 Value creation: a summary
11 The control of interest rate risk (1): the repricing gaps
12 The control of interest rate risk (2): the simulation model
13 Forwards and financial futures
14 The control of interest rate risk (3): the value equity at risk
15 The control of liquidity risk
16 Options
17 Asset and liability management: an art, not a science
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Cost of Credit
insurance
credit risk
liquidity risk
NMI: Net Margin Interest
NMI% = (Client Rate – Refi Rate)
The NMI is constant
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Fixed Rate
fixed rate credit, maturity 5 years:
CLIENT RATE
3,5%
MARKET RATE
Swap RATE
2,3%
Liquidity Margin: 0,5%
Commercial Margin
0,7%
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Floating Rate Credit
Euribor 3 months, maturity 5 years:
with caps!
CLIENT RATE
Euribor 3 months
+
130bp
MARKET RATE
Euribor 3 months
Liquidity cost: 0,5%
Commercial Margin
0,8%
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Income
Net Margin
NMI total = NMI% . Oustanding. Duration
mean rate of the portfolio
mean margin of the portfolio
mean outstanding over the period
mean duration
Income = mean rate . mean oustanding. (1/12)
74
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Financing
The objectives of the Treasurer is to find « cash »:
Capital
Deposits
Interbank market (monetary market)
Bonds issuance
Securitisation
...
75
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Liquity gap and Interest Rate gap
76
Identify the main differences between both:
Interest Rate GAP
Liquidity GAP
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Calcul du Transfer Price
77
or easier to understand
Schedule_onAmortizati
talCostOfCapiTP
Schedule_onAmortizati.TPtalCostOfCapi
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Transfer Price (TP)
in details
With:
OUTi Outstanding at period i
OUTi – OUTi-1 = AMOi Amortization at period i
ACC i : Duration of period i
DF i: Discount factor period i
.
n
1iiii
n
1ii1ii
DF.)acc.(CRD
DF).CRDCRD(K
TCI
n
1iiii
n
1iii DF.)acc.(CRD.TCIDF.AMOK
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Raroc
Raroc: Risk Return On Capital
The Raroc Methodology
Book Capital what you do have
Regulatory Capital what you must have
Economic Capital what you should have
Risk Capital what you want to have
Economic Capital: amount of equity necessary to cover the
losses the bank and its shareholders are ready to
support
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
RAROC
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
RAROC
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
RAROC
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
RAROC
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Optimiser le rendement du capital
Two measures of profitability
RAROC (risk adjusted return on capital) :
EVA (Economic Value Added ) :
Objectives are:
RAROC > Cost of Capital Economique
or
EVA>0
8
4
CAPITAL_ECONOMIC
RISK_of_COSTINCOMERAROC
CAPITAL_ECONOMIC_OF_COSTRISK_OF_COSTINCOMEEVA
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Income
Income Statement Interest received 90
+ Commisions 30
– Interest paid –70
– Reserves –10
– Operational Costs –22
Profit before Tax 18
– Taxes – 6
Profit after tax 12
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Return
Return on Capital: ROE
ROE = 12/100 = 12.0%
Earnings on assets: EOA
EOA = (90+30-10) / 1100 = 110/1100 = 10%
Cost of Debt: COD
COD = 70/1000 = 7%
Operations 22/1100 =2%, taxes are : 33% then (1-t) = 2/3
Debt ratio: 1000 / 100 = 10
86
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Returns
ROE = (EOA – OE) x (1 – t) + (EOA – COD – OE) x (debt/equity)
× (1 – t)
example:
ROE = (10% – 2%) × (2/3)+ (10% – 7% – 2%) × (100/10) × (2/3)
= 5,33% + 6,66%
= 12,0%
Decomposition of ROE:
EOA = (interest income + fees – reserves)/total assets
OE ratio = Operating expenses/total assets
Margin = EOA – COD
Leverage = debt/equity
Tax = t
87
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
RAROC and EVA
Cost of Capital : 5%
Economic Capital: 100
cost of capital: 5
EVA = 12 – 5 = 7
RAROC = 12/100 = 12%
12% > 5%
88
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
FINKEYS FRANCE
Session 05:
CASH MANAGEMENT
and FORECASTS
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Cash Management
o The Treasury function and the Working Capital
o Cash Management and Banks
o Risk Management and Banks
• FX Risk
• Interest Rate Risk
o International Cash Management
In house banking
Cash pooling
Netting
Payments
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Treasurer Strategy
Reduce Costs Banking costs: accounts, payments
Funding the firm or Placement of excess cash
Cost centre: team, Systems and Organisation
Reduce Risks Liquidity risk management
Financial Risk: FX and Interest Rate risks
Risk on Commodity prices (buyer’s role)
Credit Risk on customers
Treasury is and remains a Cost Centre
Difficulty to separate risk takers and risk hedgers
91
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Treasurer’s choices
Banking Strategy:
With Banks
Select a bank, many banks, a banking group
Select services
With Subsidiaries
Head Office/Subsidiaries relationship
Centralised or not centralised: services
Internal banking organisation
Decision making tools
Payment platform: to pay, to collect
Accounting interfaces
Information Technology and Security
92
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Organisation
The Treasurer and the Firm organisation
Tools:
Risk Management
Cash and Liquidity Management
Back Office and Front Office information system
Portfolio management
Valuation
Credit management: collection
Budget, Planning and Forecasting
Bank Communication
Reconciliation and Accounting
Project management
ERP, IAS, Netting
AS WELL AS CURRENCY FLOWS, THE TREASURER MUST MANAGE DATA FLOWS.
93
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Treasurer Functional Plateform
In House Banking
Netting
Balancing
CASH
MANAGEMENT
Payments,
Receivables,
Cash
CORPORATE
FINANCE
INVESTMENT
BANKING
FINANCING
COMMERCIAL
Banks, Financial Institutions….
Quotation,
Treasury,
FOREX,
Swaps, Options
Shares,
Bonds,
Funds
Investment,
Collection,
Factoring,
Insurance
Scales
Facilities
Credit Risk Management
Liquidity Management
Risk Management: FX and Interest
CASH
MANAGEMENT RISK
MANAGEMENT
DEBT AND
PLACEMENT
Portfolio Mngt
CREDIT
MANAGEMENT
Notation
Collection
Reconciliation
Hedging Financing
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Accounting – Data Available
95
• A summary of a firm’s financial position on a given date that shows :
total assets = total liabilities + owners’ equity. Balance sheet
• A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period
Income statement
• A summary of a firm’s cash flow movements over a specified period.
Cash flow statement
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Wal Mart Stores – Balance Sheet
96
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Wal Mart Stores – Income Statement
97
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Intermediary Balances
98
Production
Cycle
+ Production
- Costs
= + EBITDA
Investment
Cycle
Financial
Cycle
- Amortizations
-Reserves
= + EBIT
+ Financials Profits
- Financial costs
- Taxes on Profits
= + Net Profit - EAT
- Dividends
= P&L in Reserve
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Treasury and P&L
99
Cyc
le d’exploitation
+ Production Sold
- Production Costs
= Funding from Production
Cyc
le
Inve
sti
ss
em
en
t R
ép
art
itio
n
Fin
an
ciè
re
+ Financial Ressources
+ Financial Profits
- Financial Costs
- Tax on P&L
-Dividends
TREASURY WEALTH FLOWS
= Production Costs
= Stocks Variations
= Sales
= + Excédent brut d’exploitation
- Clients
- Stocks
- Suppliers
- Augmentation du BFR
- Investment
+ Amortizations
- Reimbursement of debt
+ Financial Ressources
= Profit put in Reserve = Treasury Balance + Net Cash
- Amortizations
+ Financial Profits
- Financial Costs
- Tax on P&L
- Dividends
- Investment
- Reimbursement of debt
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Working Capital
Fixed Assets
Current Assets
High Balance Sheet
Capital + Debt
(Fixed Liabilities)
Current Liabilities
Cash
Low Balance Sheet
WORKING CAPITAL
WORKING CAPITAL
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Balance Sheet
Fixed Assets 1000
Inventories1500
Social Capital 1100
Haut de Bilan
Reserves 100
Long Term Debt 500
Working Capital 500
Short Term Debt 1800 Current Assets 500
Cash 300
Working Capital 500
Bas de Bilan
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Working Capital-Presentation
Working Capital = Fixed Asset – Permanent Capital
Working Capital Need = Current Asset – Current Liabilities
Questions:
is WC >0 enough to finance Fixed Asset?
What is the level of WCN?
How is it financed?
What is the level of the Cash Account?
Cash Account = WC – WCN
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Treasury
A = WORKING CAPITAL
B
C
Capitaux propres
+ Dividends
+ Quasi fonds propres (Comptes courants , obligations convertibles, prêts participatifs);
+ dettes à long et moyen terme (dont la parties DLMT venant à échéance à moins ‘un an);
- immobilisation hors exploitation
- Immobilisations financières
= DISPONIBLE
Stocks
+ Clients
- Suppliers
= BESOIN EN FONDS DE ROULEMENT D’EXPLOITATION
+ Besoins acycliques à court terme
- Ressources acycliques à court terme
= BESOIN EN FONDS DE ROULEMENT HORS EXPLOITATION
A - B - C = Trésorerie
- Placements financiers
+ Ressources bancaires et financières (dont effets escomptés non échus)
D
Asset
Asset
Asset
Liab ility
Liab ility
Liab ility
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Cash In and Cash Out
ACCOUNTING
CASH ACCOUNT
PURCHASES SALES
CASH IN CASH OUT
Differential: for a single order:
-delays between the flows of costs (cash out), and the flows received
(cash in)
The working capital can be positive (need for cash), or negative (excess
cash).
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Cycles
FLOWS AND CYCLES
Goods
Bought
Goods
Sold
Production Cycle Payment Cycle
Supplier Cycle Treasury Cycle
Production Cycle
Payments
on Purchases
Payments
Received
Timing
DECISION = ACCOUNTING
LEVEL
PAYMENTS = TREASURY
LEVEL
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
FINKEYS FRANCE
Session 06:
DECISION MAKING
between ACCOUNTING and
ECONOMIC views
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Cash Management
The accounting framework
The decision making process
The role of actuarial mechanism
The decisions within project finance
How to define objectives within a bank, the Raroc
The wacc
Ebit, Ebidta and Eva
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Accounting
Different Accounting Report
Local and Global (consolidated/IFRS)
The need for Accounting
Financial Reporting
To pay taxes
To inform shareholders
Additional reporting:
Global risk management
Risk Control and Audit
Analytics – human ressources – sustainable
development
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Risk Management
Risk Management
Valuation
Fair Value calculation (mark to market)
Limit management (in real time)
Measure of Risk
Sensitivity model
Value At Risk (VAR and CVAR)
Performance
Return calculation
Efficiency (hedging)
Ratios (Sharpe, Raroc)
109
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Decision Making
RULE
Decisions must be based on ECONOMIC variables,
not on accounting ones.
Examples:
Amortizations
Costs of goods
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Economic Exposure
ECONOMIC EXPOSURE:
1. A forward looking concept: it focuses on future cashflows.
2. Involves real cashflows, not just accounting figures.
3. Relates to changes in the economic value of the firm.
4. Contractual exposure depends on the firm’s portfolio of FC (??)
engagements undertaken in the past.
Operating exposure depends on the environment and on the firm's
strategic response (e.g., relocation of production, changes in the
marketing mix or financial structure, etc.).
5. Also exists for firms without foreign subsidiaries, such as exporting
firms, import-competing firms, and notably potential import-
competing firms.
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Accounting Exposure
ACCOUNTING EXPOSURE:
1. A backward-looking concept: it reflects past decisions as reflected in the
subsidiary's assets and liabilities.
2. A change in an accounting value due to translation (??) is not a "realized" gain
or loss; no change in the cash situation is involved —except possibly through
taxation effects.
3. Changes the firm's accounting value, but not necessarily its market value.
4. Depends on the accounting rules chosen. This is because the subsidiary's own
internal rules affect its accounting values (e.g., type of depreciation, or inventory
valuation methods) and also because the translation process itself can be done in
different ways.
5. Accounting exposure only exists in the case of foreign direct investment, since
pure exporting or import-substituting firms have no foreign subsidiaries.
z
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Modeling
Close to modeling:
Financial calculations: Monte Carlo
Stress Testing
Forecasting on the sales side
Financial Budgeting
Dynamic vs Static GAPS
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Modeling
Why to use Modeling:
To forecast the future, to adjust capacities
To stress the hypotheses, to decrease risks
To elaborate different scenari, to take decisions
MASTER RENNES
FINKEYS FRANCE
JUNE 2013
Contact
SITE Internet
www.finkeys.com
Adresses Internet
Philippe DUCHEMIN