Leverage ratio: Budget forecast and modelling

The client is one of the largest corporate and investment banks in France. It is notably specialised in capital markets activities, specialised financial services, asset management and private banking.

THE CHALLENGE

The client wanted to have a setup which would allow them to project their leverage ratio under multiple scenarios for strategic steering and decision-making purposes and which would provide a more robust measure of the institution’s leverage effect. The quantitative approach should be simple and adapted to the institution’s portfolio and consistent with current capital planning processes. To fulfil these client objectives, the main activities were to:

• Conduct a reconciliation between accounting and ALM balance sheets
• Propose methods to project key balance sheet components in line with strategic planning processes
• Consider the specificity of the bank’s portfolios and define multiple scenarios consistent with business planning
• Design and implement an easy to use excel tool to calculate projected leverage ratio under different scenarios

APPROACH AND SOLUTION

Avantage Reply designed a comprehensive model from data specification and mapping to model build and implementation. The main elements of the modelling strategy were:

• A segmentation and mapping of the portfolio following different balance sheet components according to data availability and comprehensiveness
• Analysis and testing of the different budget assumptions per business on key balance sheet components
• The implementation of the key modelling assumptions in line with budget forecasts and business views
• The ability to project the leverage ratio under different scenarios
• Drafting the methodological and technical documentation

The key outputs from the project were the implementation of a simple tool which was integrated into the capital planning process. The documentation of the model and associated assumptions has been drafted and validated by the client.

RESULTS AND BENEFITS

The model and associated tool implemented by Avantage Reply has allowed the bank to enrich its set of comprehensive measures for capital management purposes. It also provides additional metrics for performance management and capital management for strategic decisions.