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Keywords Banking, Interest rates, Balance sheets, Risk
Abstract The author describes how SunGard installed a sophisticated interest rate risk analysis system for ABN AMRO's North American headquarters in Chicago. She details the problems involved, the difficulties overcome and the benefits gained.
he acronym "AANA" has a dual meaning to some at the Chicago-based headquarters for ABN AMRO's
North American operations. While typically standing for ABN AMRO North America, it can also stand for ALCO Analytics for a New Age. The latter embodies the notion that leading-edge analytical tools are requisite for the management of interest rate risk in a balance sheet with high levels of complexity.
ABN AMRO currently ranks as the 6th largest mortgage originator and 9th largest mortgage servicer in the world. In addition, its holdings of mortgage loans and mortgagebacked securities are sizable. Its ability to monitor the liquidity, accounting, and option risk associated with those mortgages is therefore crucial to the success of its business.
"A balance sheet with high levels of complexity"
ABN AMRO selected BancWare's Convergence solution to successfully capture and assess many of those risks using advanced analytics.
At its Chicago headquarters, ABN AMRO North America manages risk on approximately $90 billion in retail and commercial banking assets through SunGard Trading and Risk Systems' BancWare solution. ABN AMRO, a long-time user of BancWare for asset/liability management (ALM), added advanced analytics to the solution early in 1999. These include: option-adjusted valuation (OAV) modeling through the Hull and White term-structure model, prepayment modeling that incorporates the Andrew Davidson (ADCO) prepayment model, and commercial mortgage obligation (CMO) cash flows based on CMO data from Intex.
As one of the top ten US banks in mortgage originations, ABN AMRO realized that incorporating pre-payment modeling and the stochastic simulations of OAV were imperative for deriving interest rate risk exposures of its balance sheet.
"A wide variety of highly complex financial instruments"
BancWare's advanced analytical models more accurately capture interest rate risk because they consider optionalities inherent in mortgages, loans and other balance sheet items. ABN AMRO worked closely with BancWare to direct the development of models such as OAV and the prepayment model.
ABN AMRO installed BancWare's Convergence in 1993. BancWare Convergence is an integrated planning, reporting, and analysis tool that...