A Bank Asset and Liability Management Model

M. I. Kusy and W. T. Ziemba
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M. I. Kusy: Concordia University, Montreal, Quebec
W. T. Ziemba: International Institute for Applied Systems Analysis, Laxenburg, Austria, and University of British Columbia, Vancouver, British Columbia

Operations Research, 1986, vol. 34, issue 3, 356-376

Abstract: In managing its assets and liabilities in light of uncertainties in cash flows, cost of funds and return on investments, a bank must determine its optimal trade-off between risk, return and liquidity. In this paper we develop a multiperiod stochastic linear programming model (ALM) that includes the essential institutional, legal, financial, and bank-related policy considerations, and their uncertainties, yet is computationally tractable for realistically sized problems. A version of the model was developed for the Vancouver City Savings Credit Union for a 5-year planning period. The results indicate that ALM is theoretically and operationally superior to a corresponding deterministic linear programming model, and that the effort required for the implementation of ALM, and its computational requirements, are comparable to those of the deterministic model. Moreover, the qualitative and quantitative characteristics of the solutions are sensitive to the model's stochastic elements, such as the asymmetry of cash flow distributions. We also compare ALM with the stochastic decision tree (SDT) model developed by S. P. Bradley and D. B. Crane. ALM is computationally more tractable on realistically sized problems than SDT, and simulation results indicate that ALM generates superior policies.

Keywords: 192 stochastic programming model; 655 bank asset and liability management (search for similar items in EconPapers)
Date: 1986
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Citations: View citations in EconPapers (75)

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