8.1 Overview

Business assumptions are behavior patterns exhibited by a bank’s customers, or by the bank itself, which result in a change in the cash flows that occur purely under contractual terms. These include run-offs, prepayments, rollovers, draw downs, asset sale, delinquencies, recoveries, haircuts, and so on. The application allows business assumptions to be defined under normal conditions. That is, business-as-usual or under multiple stress conditions, through a parameterized and flexible graphical user interface.

The assumptions defined under multiple conditions differ in the magnitude of the behavior exhibited, which results in either change in the cash inflows and outflows. For instance, the run-off rate under normal conditions for certain deposits may be 2%, under a mild stress scenario it may be 8%, and under a severe and prolonged stress scenario, it may be 20%. The application allows you to define and maintain a library of such business assumptions of varying magnitudes and with different parameters. Once saved and approved, a business assumption is registered as a Process in the Rules Framework of Oracle Financial Services Analytical Applications Infrastructure, and can be used across multiple scenarios, Runs and time periods for computing liquidity risk metrics.

The assumptions can be used to compute liquidity gaps and liquidity ratios under BAU and stress scenarios. LRS supports pre-packaged business assumption required for computing liquidity coverage ratio in accordance with the BIS Basel III guidelines.

On execution of a BAU or stress Run, one or multiple business assumptions are applied to the contractual cash flows whose attributes correspond to the dimensions specified in the assumption. The application of an assumption results in an increase or decrease in cash flows, movement of cash flows from one bucket to another, change in the value or the encumbrance status of an account depending on the type of business assumption.

Note:

Every SKU in the Liquidity Risk Solution (LRS) pack leverages this common user interface.