Sound basis for interest and liquidity risk management

Referenz GEFA Bank

GEFA BANK (Gesellschaft für Absatzfinanzierung), a subsidiary of the Société Générale banking group, is a major European sales and investment funding provider. The company offers tailor-made financing and leasing solutions for mobile assets such as machinery, equipment and commercial vehicles as well as related services. In order to meet the regulatory requirements for modern asset and liability management (ALM) and to guarantee the standards of the parent company, which is supervised by the ECB, GEFA’s management decided to implement the software zeb.control - ALM in collaboration with zeb.

Consistent: the implementation

In a first step, we specified the business requirements for implementing market risk management (interest rate and currency) and liquidity risk management, which can be derived from regulatory requirements (MaRisk, Basel II/III, EBA guidelines, etc.), but also the requirements from GEFA’s internal management and those specific to the group. Subsequently, we compared GEFA’s existing feeder systems with the business data requirements, defined the necessary data fields and processes and ensured the automated integration of all relevant feeder systems.

For the technical implementation of the ALM system in zeb.control, we jointly developed a modular target architecture. In this context, GEFA attached great importance to the implementation of both zeb.control - ALM management software and an application that enables rule-based detection and audit-proof correction of data quality problems (data quality management). Furthermore, the ALM architecture provides interest and liquidity cash flows for single transactions of GEFA and product aggregates. This enables higher-level analyses both for various units within the GEFA group and for individual account-related data requirements for interest and liquidity reporting at group level.

In addition to present value interest risk management, which characterizes GEFA’s current management philosophy, we implemented a multi-period, P&L-oriented perspective for the interest rate portfolio. For this purpose, we created ALM scenarios for the development of customer business conditions and market interest rates and coordinated the planning of the balance sheet structure with the controlling department. In addition, we defined liquidity spreads based on direct and indirect liquidity costs and set up a transformation result balance sheet. This makes it possible to include GEFA-specific liquidity costs both ex ante and ex post in the margin calculation.

In addition, a clear delimitation of the periodic net interest spread and transformation results ensures transparency of the effects of the interest and liquidity maturity transformation on net interest income.

For GEFA’s liquidity risk management, we implemented appropriate liquidity overviews and, based on these, developed detailed management and stress scenarios (see Fig. 1). In order to ensure a management basis in line with the capital commitment, we first specified the items relevant for the funding matrix and the liquidity coverage potential. Based on this GEFA-specific management scenario, we then developed a limit concept. In addition to the “survival period” required by the regulatory authorities, this concept includes additional deductions from the liquidity coverage potential to ensure GEFA’s solvency in the short and long term. We developed additional stress tests to gain an even more detailed insight into potential liquidity risks.

Key liquidity overview for GEFA

2. Effective: the results

Following the completion of the documentation on the ALM business and IT processes, the parameterizations in zeb.control - ALM and the testing of the ALM reports, GEFA is now in a position to

  • carry out all analyses on the basis of harmonized, quality-assured data

  • determine or simulate present value interest rate risks (e.g. PVBPs, Basel II interest rate shock, scenario analyses, VaR) and to derive any necessary measures from these results

  • perform net interest income simulations over several periods and detect identified weaknesses in profits under commercial law at an early stage

  • create transparency with regard to the significance of sales and treasury success and to manage both profit components separately

  • identify and manage potential liquidity gaps in a timely manner based on realistic scenarios and the early warning indicators of the new limit system

  • meet its own regulatory requirements with regard to market and liquidity risks as well as group requirements by means of an ALM system platform

3. Future-proof: outlook and conclusion

The new ALM system provides GEFA with a sound basis for generating greater transparency and depth of detail regarding interest rate and liquidity risks and for better estimating the consequences of simulated measures on profits. This will enable the company to focus even more strongly on risk management. In addition, GEFA will use the system for other business topics, such as determining terms and planning capital requirements.