13.12 Earnings-at-Risk

Earnings-at-Risk is a methodology for income sensitivity that combines the Monte Carlo Rate Generator with the cash flow engine to produce statistical information about forecasted income. Earnings-at-Risk functionality uses the stochastic processing methodology to provide users with a probabilistic view of forecasted earnings for individual products and the entire balance sheet. The probability distribution of earnings enables users to view expected income as well as the potential loss of income in the future due to interest rate fluctuations. With this information, users can efficiently determine what is likely to happen as well as identify the scenarios that may provide the greatest risks to the institution.

An Earnings-at-Risk process reads records from the following sources:

• Instrument Data
• Transaction Strategy
• Forecast Balance

Cash flows are calculated for each record, for every rate path generated by the Rate Generator. Earnings results may include the following financial data, depending on the account type of the product:

• Net Interest Accrual
• Deferred Runoff
• Non-interest Income
• Non-interest Expense
• Dividends
• Taxes

The following four sets of output data are available after an Earnings-at-Risk processing run, for each modeling bucket as defined in the active Time Bucket definition:

• Average income overall rate paths for each product
• Average income overall rate paths for the entire bank
• Income in each rate path for each product
• Income in each rate path for the entire bank

From the preceding list, the average income data sets are output for every Earnings-at-Risk process. The other two output sets are optional and may be selected as part of the process definition.

The output is stored in the following tables:

• EAR_LEAF_DTL_xxx - (optional) Earnings are aggregated by product and stored for each rating scenario.

  Note:

  Earnings are equivalent to net interest accrual in scenario-based processing.
• EAR_LEAF_AVG_xxx - Average earnings are calculated for each product by taking the simple average across all rate paths for each modeling bucket.
• EAR_TOTAL_DTL_xxx- (optional) Both net interest income and net income values are calculated, aggregated across products, and stored for every rate scenario per modeling bucket. Net interest income is calculated as interest income less interest expense. Net income is calculated as net interest income and non-interest income combined, less non-interest expense, fewer taxes, if applicable.
• EAR_TOTAL_AVG_xxx - Net interest income and net income values as described earlier are averaged across all rate paths for each modeling bucket.

Additionally, the initial balances and rates are output to FSI_O_RESULT_MASTER based on the instrument records being processed. This records information on each product such as the par balance, deferred balance, weighted current rates, and weighted average remaining maturity.

As with any Stochastic Process, users have the option to output audit results for cash flows and rates (For more information on Audit in ALM Processing, see Oracle Financial Services Asset Liability Management User Guide).

Note:

Historical/Monte Carlo simulation is a single factor modeling of interest rates of Reporting Currency. Although the engine does convert Balances into Reporting Currency, there is no correlation of Risk factors of particular Currency’s Interest rates with Reporting Currency. Stochastic processing is not intended for Multi-currency processes. For best results, run Historical/ Monte Carlo calculation for a Single currency where Functional Currency = Reporting Currency.