Voloshyn, Ihor and Voloshyn, Mykyta (2013): Riskadjusted pricing of bank’s assets based on cash flow matching matrix. Published in: ACRN Journal of Finance and Risk Perspectives , Vol. 2, No. 2 : pp. 4959.

PDF
MPRA_paper_61611.pdf Download (401kB)  Preview 
Abstract
To price bank’s assets correctly, it is important to know cost of funds. But funding cost calculation is complicated due to the fact that banks fund long term assets through shortterm liabilities. As a result, assets with a given time to maturity are usually financed by several liabilities with different maturities. To calculate funding cost it needs to know how cash flows are matched between assets and liabilities. For this it`s used cash flow matching matrix or funding matrix. In the paper, a new algorithm of filling of a twodimensional funding matrix that is based on the golden rule of banking and modified RAROC approach is proposed. It provides positive definiteness and uniqueness of the matrix. The matrix shows terms to maturity and amounts of liability cash flows which fund the asset cash flow with a given term to maturity. Examples of partially and fully filled matrices are presented. It is proposed an approach to riskadjusted pricing that is based on this funding matrix and RAROCapproach adapted to cash flows. The developed approach to pricing integrates organically credit and liquidity risks. It takes into consideration expected credit losses and economic capital (unexpected credit losses) for all lifetime of asset cash flows and not oneyear period traditionally used in RAROC.
Item Type:  MPRA Paper 

Original Title:  Riskadjusted pricing of bank’s assets based on cash flow matching matrix 
Language:  English 
Keywords:  asset pricing, funding matrix, economic capital, cash flow at risk,riskadjusted return on capital (RAROC), cash flow matching, interest rate, asset, liability 
Subjects:  G  Financial Economics > G1  General Financial Markets > G12  Asset Pricing ; Trading Volume ; Bond Interest Rates G  Financial Economics > G2  Financial Institutions and Services > G21  Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages 
Item ID:  61611 
Depositing User:  PhD Ihor Voloshyn 
Date Deposited:  30 Jan 2015 01:22 
Last Modified:  28 Sep 2019 20:37 
References:  Bessis, J. (1988). Risk Management in Banking. West Sussex, England: Wiley & Sons Inc. Bohn, J. R., & Stein, R. M. (2009). Active Credit Portfolio Management in Practice. Hoboken, New Jersey: Wiley & Sons Inc. Derkach, O.V., Smoliy, Y.V., & Linder, M.V. (2000). Estimation of affectivity of banking operations. Modelling and information systems in economics (Ukraine), 63, 204. Deutsche bank. (2012). Funding Matrix. Retrieved 11 June 2013 from https://www.db.com/ir/en/content/funding.htm Hübner, O. (1853). Die Banken. Leipzig: Verlag von Heinrich Hübner. Leo de Haan, & Jan Willem van den End. (2012). Bank liquidity, the maturity ladder, and regulation. Retrieved 29 May 2013 from http://www.bis.org/events/bokbisimf2012/session3_bank_liquidity.pdf RiskMetrics Group. (1999). CorporateMetrics™ Technical Document. Retrieved 21 May 2013 from http://www.ucema.edu.ar/u/jd/Metodos/Clases/CorporateMetricsTechDoc.pdf. Sinkey, J.F (2002) Commercial Bank Financial Management in the FinancialServices Industry. Upper Saddle River, NJ: Prentice Hall Skyrta, V.B., & Stovbchatiy, A.A. (1997). A Method of ExpressAnalysis of BalanceSheet of a Commercial Bank. Banking technologies: Computers+Programs (Ukraine), 3, 7879. Veselov, A.I. (2012). A method for constructing of the matrix of funding in the bank. Finance and credit (Russia), 7(487), 2630. Voloshyn, I.V. (2002). Funding matrix of minimal interest rate risk. Financial risks (Ukraine), 4(31), 121–124. Voloshyn, I.V. (2013). Loan pricing based on “CashFlowatRisk” approach: integrated approach to credit and liquidity risks. Management of Risk (Russia), 1, 5357. Yan, M., Hall, M. J. B., & Turner, P. (2011). Estimating Liquidity Risk Using The ExposureBased CashFlow atRisk Approach: An Application To the UK Banking Sector. Retrieved 11 June 2013 from http://www.lboro.ac.uk/departments/sbe/RePEc/lbo/lbowps/ Yan_Hall_TurnerWP6.pdf 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/61611 