Balance sheet management solution: integrating credit, interest and liquidity cost
Date
2018
Authors
Strydom, Petrus Johannes
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Abstract
This thesis main contribution is the model framework based on the projection of
the banks' balance sheet taking all major nancial risks into account. Real bank
data is used to support this analysis, covering a large range of customer and product
level data across both retail and corporate products. This thesis explicitly explores
the link between retail customers from a deposit, lending activity and performance
and other market driven factors such as liquidity risk premium of cost of funding.
Various optimization techniques are tested, con rming the value of a strategy that
dynamically re-balance the funding pro le of the bank versus a more static approach.
In this thesis, we apply two optimisation frameworks to determine the optimal
wholesale funding mix of a bank, given uncertainty in both credit and liquidity
risk. A stochastic linear programming method is used to nd the optimal strategy
to be maintained across all scenarios. A recursive learning method is developed to
provide the bank with a trading signal to dynamically adjust the wholesale funding
mix as the macroeconomic environment changes. The performance of the two
methodologies is compared in chapter 3. The optimisation target is the net interest
income of the bank. The on-line recursive learning method provides superior results
as this allows the bank to dynamically adjust the funding pro le.
This thesis integrates the sub-components underlying the bank's balance sheet to
facilitate the projection of the net interest income allowing for both liquidity, interest
and credit risk. The sub-components include retail and wholesale loans, retail
and wholesale deposits and bank issued debt instruments. Actual historical data
was obtained from a South African bank to calibrate a model for each of these subcomponents
(discussed in chapters 4-7).
Description
Degree of Doctor of Philosophy:
A Thesis submitted to the Faculty of Science, University of the Witwatersrand,
Johannesburg, in fulfillment of the requirements for the Doctor of Philosophy.
May 29, 2018