Elevating risk managers from report-oriented "data jockeys" to individuals whose asset/liability analysis is specifically focused on current performance measurement and risk management projections to increase a financial institution's profitability is a work in progress-and music to any bank CEO's ears. An increasing number of financial industry players are relying on sophisticated technology to address interest rate volatility and the growing complexity of bank portfolios, which translates into a greater need for managing asset-based liability.

One such institution is Chase Manhattan Bank. Although the logistics of merging Chase Manhattan Bank and Chemical Bank were a significant undertaking from an organizational, infrastructural and cultural standpoint, the fusion of their risk management requirements was simplified by RADAR RiskManager, a software package developed by Risk Management Technologies (RMT). The system, which is used to manage the asset-based liability of Chase's enormous balance sheet, delivers analytical results both for specific future economic environments, and, by using Monte Carlo simulation, for a wide range of potential environments simultaneously, allowing institutions such as Chase to better manage the dynamic response behavior of their product and portfolio with full regard for future market volatility.

Analyzing a host of OUTCOMES

Using a wide variety of interest rate forecasts, the system enables risk analysts to examine the entire range of outcomes for each account to maximize a bank's profitability-marking a substantial movement away from traditional asset/liability management systems that only ensure a bank has sufficient cash reserves to meet its current liabilities.

And sources say that its analytical capabilities have made the system a crucial forecasting tool. It can store up to 44 pieces of account information for each month in the forecast period; data fields can include cash flow, average balance, ending balance, and interest cash flow, among others. "It can slice and dice the data any way you wish," says RMT chairman Dave LaCross, who currently finds himself competing against the likes of Treasury Services, Logica, and Hogan Systems.

Perhaps more importantly, RADAR preserves the linkage between the underlying raw data of an institution and the data produced as a result of its analytical process. If, for example, the results of a bank's risk analysis seem strange, a risk manager can reexamine the loan information in its original format before proceeding.

Such capabilities are vital in the wake of a merger. Chase officials needed a quick way to judge the value of its mortgage portfolio risk given the complex business climate. "RADAR's flexibility allowed us to incorporate the two banks' assets very quickly so that we were looking at a merged position from day one," says Tom Stenger, senior vice president of portfolio management for Chase Manhattan Mortgage Corp. in Edison, NJ. The system enables the bank, which holds $27 billion in mortgage loans, to better estimate its options risk, as well as implement strategic financial planning and forecasting.

Stenger says that, as a result of the system's implementation, Chase's hedging strategies have been driven by the bank's ability to obtain a better understanding of its options risk. Similarly, its operating procedures have been streamlined in an increasingly demanding regulatory environment. "RADAR has allowed us to manage our portfolio within tightly mandated corporate risk limits while providing the mortgage bank with stable income," he says.

DATA JOCKEYS NO MORE

Gone are the days when mortgages and profitability existed in parallel worlds. The union of performance measurement and risk management projection means that more time can be allocated to making decisions based on what-if scenarios that link historical performance and future market volatilities. Prior to its implementation of RADAR three years ago, Chase's mortgage division spent 80 percent of its time pulling together data, but only 20 percent of its time analyzing the data, according to Stenger. And it took one month to produce a report. After deploying Berkeley, CA-based RMT's system, that ratio was reversed, he says, which means that the mortgage division spends 80 percent of the work day making decisions that can influence the bank's profitability. Reports are now generated daily; forecasts of various interest rate scenarios are compiled at night so that managers have a new report to read each morning when they arrive. "It allows us to analyze our whole market position on a day-to-day basis," Stenger says.

And Chase isn't alone. RMT's technology also transformed Denver- based CoBank's approach to asset/liability management, according to CoBank's Skip Stevenson, senior vice president and treasurer. "It gives us a much better handle on embedded optionality on the balance sheet and how the values of those options will react under a wide variety of interest rate scenarios," he says. "We never had that information before."

The agribusiness lender, which is the largest in the U.S. farm credit system with $19 billion in assets managed, had no way to assess the value of its options prior to installing RADAR in August 1994. The system stores information on a database and provides a consistent method to value everything on and off the CoBank's balance sheet. CoBank officials use the system to do a complete run of balance sheet each month and, on an ad hoc basis, to price product with embedded optionality, Stevenson says. The data is loaded one to two business days after the books are closed, allowing managers more time to review future business opportunities. "It's given us a much greater sense of confidence in the costs of our products with options in them," he adds. The net result: CoBank is offering a wider range of loan products to customers.

Mnterprisewide alm

New technology such as RMT's RADAR will become more important in asset/liability management as banks offer a greater number of complex financial products and push harder to achieve enterprisewide risk management, according to analysts. "Systems become integral in the ability to integrate information across the lines of business products," says Mike Haubenstock, a partner in Price Waterhouse's risk management practice.

RMT's LaCross agrees, pointing out that the complexity of financial instruments, coupled with increasing demand for transaction information by government regulators, is a boon to enterprisewide risk management.

Major challenges

Given this environment, LaCross sees several major challenges facing risk managers. The task of pricing embedded options correctly is growing more difficult as balance sheets become more complicated; the number of off-balance sheet products is increasing; and the volatility of interest rates is rising.

This business framework presents a formidable challenge for risk managers who face regulators that are insisting on standardized measurements of risk. The regulators put "incredible pressure on financial institutions to show they are under control," LaCross says. And consolidation puts even more emphasis on merging banks to quickly and accurately determine their asset-based liability. "Competition between institutions is greater, making financial instruments more complicated," he says. "Complexity may increase volume, but it doesn't necessarily mean more profit unless (bankers) understand the financial return." LaCross-and a growing host of others in the risk space-hopes to help them do just that.

-mulhern tfn.com

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