Sample FE applications in Banking

Serkan Turhal

Nov 2014, Bogazici University, FE 500

Sample FE applications

Funds Transfer Pricing Applications

Characterization of time deposits

Deposit pricing models

Early Warning and Delinquency management systems

Funds Transfer Pricing is an internal funds management framework

FTP application areas
Profitability
measurement

ALM
management

Simple Bank Example

Illustrative FTP curve

Pricing

ING branch daily pricing & FTP sheet

Lending rate

Rate

Bank RC

Retail

Marginal
Wholesale
Rate

Credit margin for branch

Corporate
Mismatch margin (ALM unit)

Deposit margin
for branch

Branch
Channel

Deposit rate

Campaign
Customer

1 mo

RM
Transaction

Helps allocating banks

profitability to lower
levels of the bank

12 mo 18 mo 24 mo
Repricing Term

Source: OW workshop material

Insulates business units

particularly from
interest rate risk

Informs/guides customer pricing

and helps implementing B/S
strategy

Characterisation of deposits

Framework for deposit

characterisation

Core/volatile analysis identifies

core balances that provide a
liquidity or duration benefit

1. Balance volatility
and sensitivity
Core

2. Average life
analysis

Rate-Sensitive

Volatile

Mortality/decay analysis
determines the average life
attributed to the core portion of
the deposits
# Accts

Ave. Life

Time

Behavioural maturity is often very different to

contractual maturity
Current accounts (contractually on demand)
usually the stickiest and longest term liabilities
Time deposits/ savings typically quite volatile
and short-term

Sample Average Life Analysis

Retail TL Demand Deposits
Customer attrition analysis

Retail TL Demand Deposits

Customer balance life histogram
1000000

120%

120%

100%

100%

80%

80%

60%

60%

40%

40%

20%

20%

0%

0%

900000
800000

Frequency

700000
600000
500000

400000
300000
200000

5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
105
110
115
120

AGE

Average Life = x months

1M
6M
11M
16M
21M
26M
31M
36M
41M
46M
51M
56M
61M
66M
71M
76M
81M
86M
91M
96M
101M
106M
111M
116M
121M

100000

Average Life = y months

2002_1
2002_2
2002_3
2002_4
2002_5
2002_6
2002_7
2002_8
2002_9
2002_10
2002_11
2002_12
2003_1
2003_2
2003_3
2003_4
2003_5
2003_6
2003_7
2003_8
2003_9
2003_10
2003_11
2003_12
2004_1
2004_2
2004_3
2004_4
2004_5
2004_6
2004_7
2004_8
2004_9
2004_10
2004_11
2005_1
2005_2
2005_3

Deposit Pricing models

Average Deposit Price Forecast Tool
Select date

18/10/2013

Forecast Data
Forecast vs. Actual comparison for 14/10/2013 - 18/10/2013
Actual CB3M
8.19%
Model 1 CB3M
8.70%
Model 2 CB3M
8.64%
FTP
9.00%

Forecast for 21/10/2013 - 25/10/2013

Forecast CB3M - Model 1
Forecast CB3M - Model 2

8.11%
8.12%

Historical Graph
Set the graph date period
Date1
Date2

Dropdown
28/10/2011
14/06/2013

Forecasted CB3M_v2

Select curves for the graph

Line1
Line2
Line3
Line4
CB3M

Forecasted CB3M

Dropdown
Forecasted CB3M_v2
CB3M
Forecasted CB3M
Forecasted CB3M

Forecasted CB3M

13.00%
12.00%
11.00%
10.00%

9.00%
8.00%
7.00%
6.00%

07/06/2013

24/05/2013

10/05/2013

26/04/2013

12/04/2013

29/03/2013

15/03/2013

01/03/2013

15/02/2013

01/02/2013

18/01/2013

04/01/2013

21/12/2012

07/12/2012

23/11/2012

09/11/2012

26/10/2012

12/10/2012

28/09/2012

14/09/2012

31/08/2012

17/08/2012

03/08/2012

20/07/2012

06/07/2012

22/06/2012

08/06/2012

25/05/2012

11/05/2012

27/04/2012

13/04/2012

30/03/2012

16/03/2012

02/03/2012

17/02/2012

03/02/2012

20/01/2012

06/01/2012

23/12/2011

09/12/2011

25/11/2011

11/11/2011

28/10/2011

5.00%

Customer categorization models are used in collection processes

Customer Categorization Approach
Dimension 1 (D1)

Dimensions
Dimension 1 (D1)

Low

C3

C2

C1

Med

C6

C5

C4

Based on regression analysis of delinquent

customer data on Jan 1,2012

Dimension 2 (D2)
High

C9
Low

C8

C7

Med

High
Dimension 2 (D2)

Customers are categorized into 9 categories; C1

being the highest risk customer with the highest
outstanding risk and lowest collectability and C9
being the lowest risk customer with the lowest
outstanding risk and highest collectability
Collection effort is prioritized based on this
categorization

Thresholds are set based on O/S risk profile

Low < 50 K, 50K < Med < 250 K, High > 250 K