The document discusses the need for integrated balance sheet management in financial institutions. It notes that traditional ALM focusing only on interest rate risk and capital is evolving into dynamic balance sheet management that drives strategic decisions. Future state balance sheet management will fundamentally change operating models, rationalize data/technology, and use enhanced analytics to optimize strategies under multiple constraints. Implementing these changes requires sponsorship from the Board and cross-functional participation across the organization.

1. Integrated Balance Sheet Management
9 May 2013
Raj Murdia, Ernst & Young
Raj.murdia@ey.com

2. Page 2
Overview
► Regulatory reform, changes in Board risk appetite and shifts in the competitive
landscape have significantly increased the complexity of balance sheet
management.
► Traditional ALM focusing on interest rate risk in the banking book and capital
attribution is evolving to dynamic balance sheet management, driving strategic
business and risk management decisions at the highest levels in financial
services organizations.
► Future state strategic balance sheet management will drive:
► Fundamental changes in the operating models of financial services
organizations
► Rationalization and enhancements in data, technology and reporting
► Enhanced analytics to support balance sheet optimization and strategic
planning given multiple binding constraints
► Implementation is complex, requiring sponsorship by the Board and executive
management, as well as cross-functional participation from Finance, Risk and
business lines.

3. Page 3
Traditional balance sheet management and current
challenges
This document contains information in summary form and is therefore intended for general guidance only. It is not
intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young
LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss
occasioned to any person acting or refraining from action as a result of any material in this document. On any
specific matter, reference should be made to the appropriate advisor.

4. Page 4
Traditional balance sheet management
► Performed by corporate treasury with a focus
on the banking book.
► Objective to fund plans delivered by business
lines and manage associated IRR and FX risks.
► Input, rather than the driver of strategic plans
► Product pricing and performance management
do not capture all liquidity risks and costs,
particularly contingent risks.
► Data lacks sufficient granularity and
frequency to meet emerging regulatory
expectations.
► Silo-based governance, organization, risk
analytics, data and technology infrastructure.
Long-Term
Funding
Trading Book Short-term
Funding
Banking Book
Core Capital
(Including Retained
Earnings)
CR
CR
MR
LR
IRRBB
LR
MR LR
Operating models in many organizations make it difficult to provide the Board and senior
management with a holistic view of the balance sheet. Silo-risk analysis can fail to capture inter-
dependencies across risk categories and may not fully test the resilience of a bank’s balance sheet.

5. Page 5
Traditional planning model
Strategic planning in many organizations does not allow sufficient two-way flow of information
between functions and focuses on aggregation of inputs, rather than dynamic analysis and
optimization.
Management Committee, Board of Directors
Risk Management
Asset Liability Committee
InterestRateRisk
LiquidityRisk
CreditRisk
OperationalRisk
OtherMaterialRisks
Funding
InvestmentPortfolioMgmt.
MaterialRiskAssessment
Capital
Planning
Stress
Testing
B/S Forecast I/S Forecast
Enterprise Risk Committee
TreasuryPlanning
Lines of Business
FundsTransferPricing

6. Page 6
Regulatory considerations for balance sheet management
The Regulatory reform landscape is complex and dynamic. Interrelated regulatory requirements
impact functional areas across the organization.
Balance Sheet
Management
FDIC IDI
Rule and
DFA 165(d)
resolution
plans
Basel “2.5”
trading
book capital
CCAR –
stress
testing and
capital
plans
US SIFI
Enhanced
prudential
standards
NPR
SR 10-1
Interagency
guidance
IRR
SR 11-7
Interagency
guidance
Model Risk
Basel III,
SR10-6, RN
10-57 on
Funding,
Liquidity
Risk
Funding &
Liquidity
Management
Cash
Management
Operations &
Technology
Capital
Management
Capital
Markets
Investment
Management
Finance
ALM &
Hedging
Capital
Management
Enterprise
Risk/CRO Credit Risk
Market Risk
Internal Audit
Lines of
Business
Financial
Planning
Living Will

7. Page 7
Gap to crisis
Capital and
liquidity
ratios
time
Stress
buffer
Recovery
zone
Resolution
Failure
threshold
Crisis
threshold
(capital or
liquidity
event)
Lower end
of
operating
range
Current
Capital/liquidi
ty ratios
Upper end
of
operating
range
Stress testing
Analyze potential
impact of stress
scenarios and risk
mitigation options
Further stress
testing
Identify potential
crisis/failure
scenarios;
demonstrate strength
of capital/liquidity
position
Recovery plan
Plan for potential
recovery actions to
address severe stresses
Resolution plan
Support efficient legal
entity resolution
activities after failure
Risk appetite calibration
The amount of risk that
the firm is willing to
accept given target
capital/liquidity position
Risk capacity analysis
The maximum amount of
risk that can be borne
given current
capital/liquidity levels
Business Planning requirements
Risk
appetite
inputs
Living
will
Target
operating
range
Increasing scope for analysis and decision making
Business decisions need to be evaluated and their implications considered not only in BAU or
Stress scenarios, but in the extreme stress (Recovery and Resolution) scenarios as well.

8. Page 8
Funding and liquidity strategies to address LCR binding constraint:
Overlay capital considerations:
Illustrative example: liquidity and capital considerations
► Strategy 3 may be the lowest-cost strategy today to achieve LCR compliance, but requires significant debt
issuance, indicates a low risk-appetite as leverage ratio becomes binding and weak return profile to the
shareholder
► Strategy 1 and Strategy 2 reduce risk-weighted assets but at the expense of negative carry
Strategy 1: shift investment portfolio mix Strategy 2: shift asset mix Strategy 3: balance sheet expansion
► Increase level 1 securities and reduce
LCR level 1 non-eligible securities
► Increase level 1 securities and
decrease loans
► Increase level 1 securities and issue
3-year long-term debt to fund the
security purchase
Investment portfolio security
yield:
3.1% Yield on loan portfolio: 4.5% 3-year note coupon
(treasury + 130-160 bps)
1.6%–1.9%
5-year treasury rate: 0.6% 5-year treasury rate: 0.6% 5-year treasury rate: 0.6%
Investment shift impact: 250 bps Asset shift impact: 390 bps Negative carry on level 1
assets
100 bps–
130 bps
► More complex situations would involve decisions between disparate portfolios across the entire balance sheet;
e.g., investing in mortgage loans vs. leveraged leases

9. Page 9
Need for a new strategic balance sheet management
operating model
This document contains information in summary form and is therefore intended for general guidance only. It is not
intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young
LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss
occasioned to any person acting or refraining from action as a result of any material in this document. On any
specific matter, reference should be made to the appropriate advisor.

10. Page 10
Capital planning Liquidity forecasting
Stress tests RRP Stress tests CFP
Risk profile: how much risk are we exposed to? Risk appetite: what risks should we take?
Credit Market
Operational
Liquidity
Reputational
New business and product approval
Measuring risk-based returns
Risk within strategic planning
Board-approved risk appetite
Internal controls
Data and IT capabilities
Enterprise risk
profile
• Enterprise-wide
view of risk
• Emerging risk
identification
Regulatory
constraints
• Minimum capital
and liquidity
ratios
• Other prudential
requirements
Linkage of risk-taking
and regulatory
requirements with
strategic goals
• Challenging business
environment
• Leverage ratio vs.
risk based capital
(RBC) continuum –
risk-return reward,
size of balance sheet
• Focus on counter-
cyclicality and tight
underwriting
• Trade-off between
higher liquidity
requirement,
earnings, leverage
and RWA
Aggregation
Concentrations
Correlation
Risk capacity: how much risk can we take?
Internal risk-based view of capital and liquidity
Regulatory minimum capital and liquidity
Integrated balance
sheet analysis
Enhanced balance sheet analytics and decision making
Resilience
constraints
• Internal
operating range
for risk and
capital
• Contingency and
recovery options
Optimizing balance sheet strategies considering regulatory constraints, risk appetite and business
objectives requires integrated and dynamic analysis.

11. Page 11
New operating model
Enhanced governance, functional, data and infrastructure capabilities
Board of directors and board-level risk committees
► Establish risk appetite and responsibility for risk governance and approval (e.g., approval of capital plan, establishment of liquidity risk
tolerance)
► Active and interventionist role for the board-level risk committee with respect to the oversight of management risk-taking
Risk functions (CRO)
► Capabilities to support enhanced reqmts. for:
► Enterprise risk monitoring, aggregation and reporting
capabilities and risk committee reporting
► Liquidity risk monitoring and reporting
► Daily counterparty exposure identification, calculation
and monitoring; monthly counterparty exposure
reporting
► Capital and liquidity stress testing
Finance functions (CFO)
► Capabilities to support enhanced requirements for:
► Liquidity management requirements — detailed cash flow
projections, monthly stress testing, contingency funding plan;
liquidity monitoring against limits including intraday liquidity
and collateral, formal documentation of assumptions
► Formal review of liquidity management effectiveness
► Increased regulatory reporting expectations — daily cash flow,
monthly reports on single counterparty exposures
► Capital plan and stress testing
Data management and IT infrastructure
► Build sustainable data provisioning and underlying architecture to support enhanced capabilities
► Significantly increase the granularity and timeliness of reporting (e.g., legal entity, daily). Develop single “golden” sources of data at
enterprise level. Focus on aggregation (inc. aggregate counterparty positions) and finance and risk data reconciliation
Executive management and business strategy
► Strategic analysis on the viability of certain products and activities against regulatory and market constraints
► Active role in investment decisions supporting regulatory spend (e.g., prioritization, first-mover advantage)
► Enterprise-level governance over implementation/transformation projects and workstreams
Liquidity risk
management
CP exposure
monitoring
Stress testing
Capital and
funding plans
Lines of business
► Shaping business strategy and implementation approach related to addressing the financial reform agenda
► Ability to assess businesses against multiple constraints — multiple risk-based capital ratios, liquidity ratio, leverage ratio — and business
performance metrics
Audit — Effectiveness of reform projects. Impact on audit universe, new business models and risk/compliance processes
Enterprise compliance — Ability to manage as an integrated, firm-wide management discipline

12. Page 12
The Scorecard approach for more complex tradeoffs
across entire balance sheet
VS.
Business Model
Asset Liability
Management
Regulatory Capital
Market and
Shareholder View
Loss Rates
+
1 +
Risk (Volatility and
Correlation)
PPE and NIAT
MORTGAGE SERVICING RIGHTS
PPE/OS = $X, NIAT/OS = $X (seasoned)
Short Payback
± Basel 1: 100% RW
Basel 2: Low given asset quality
Liabilities easily hedged with
balance guarantee swaps
+
+
-
+
- Basel 3: Punitive treatment (only 10%
allowed vs. 90% earlier)
High RoE
Short Payback
- Daily hedging using TBAs etc.
Hedging and Acct. operationally demanding
Natural alignment and natural hedge
with origination
Considered inferior collateral loans
Very Low: <1% (Through-the-Cycle)
+ Low volatility
Imperfect correlation with other assets
- Considered risky due to volatility
“Free” money
MtM volatility flows through earnings
±
SCORECARD
N/A
Natural hedge with HFI Portfolio
High volatility
±
2
1
2
4
3
4
PRIME AUTO ASSETS
Rank-ordered
+RoE and Economic
Profit
High: X% Average (post-hedge): Y%±3
Liquidity / Impact
on LCR, NSFR
+ Short dated; Relatively easy to sell
Impact on LCR using stable funding: X%
- Illiquid, difficult to dispose
Impact on LCR using stable funding: X%5
QuantitativeQualitative
±
► Balanced Scorecard articulates goals and constraints and provides transparency and objectivity in decision
making.
► Forms the basis for tradeoff decisions, allocating B/S and setting targets at high level LoB segments
► Composed of a few critical and meaningful metrics that do not change too frequently
Illustrative example

13. Page 13
Traceability to validate treasury infrastructure
Target operating model (TOM)
Outlines key functional
components and processes
Business requirements (BRD)
Describes the functional and
non-functional requirements
Balance sheet
Granular logical chart of
accounts
Data groupings
Logical grouping for data
requirements
Reporting requirements
Describes management and
regulatory requirements
considering target state for
reporting
Product hierarchy
Groups charts of accounts in
platform to optimize system
functionalities (e.g.,
dimensions)
Data requirements
Consolidates the data
elements needed to produce
management and regulatory
reporting
Solution design
End-to-end solution design
(sourcing to reporting)
Logical data model
End-to-end solution design
(sourcing to reporting)
Data dictionary
Description for product and
data elements
Business rules
Outlines functional and
technical rules
Business drivers
1. How do I know that business
requirements are complete and at the
right granularity?
2. How do key business inputs translate
into technical delivery and can
actually produce intended results?
3. How do I think about balance sheet
management, capital, funding and
liquidity in a structured way?
4. How do I ensure complete balance
sheet and product coverage?
Traceability benefits
1. Clear auditabillity from regulatory
requirements to solution
implementation
2. A structured approach to phasing
business benefits
3. Comprehensive balance sheet and
product coverage
4. Clear mapping to delivery inputs
(e.g., data model, interfaces, testing)

14. Page 14
Traceability example
1. Business requirement: Automated reporting solution capable of
producing the Fed 4G Report
2. Reporting line item: 9.10 Cash Balance at Federal Reserve
3. Business rule
Product Code = Interest Earning Balance with Other Banks OR Non
Interest Earning Balance with Other Banks
AND Party Long Name = Central bank AND …
5. SQL to fulfill Line 9.10
SELECT: Balance Amount
FROM: Position Fact, Instrument Dimension,
Party Dimension, Purpose Dimension
WHERE
(Instrument Dimension.Product Code =
Interest Earning Balance with Other Banks OR
Non-Interest Earning Balance with Other
Banks) AND …
4. Data definition
Product Code
Party Long Name
Balance Amount
Business/regulatory needs Demonstrated linkage to reporting solutions
Business requirements and data requirements are not enough; traceability formally documents the
mapping of requirements to infrastructure and the reports generated by treasury.

15. Page 15
Accountability and governance
Treasury data steward establishes
governing body, roles and
accountabilities and defines data
reconciliation strategy
Data provisioning (sourcing)
Consolidate data sourcing from
LOB by product group through
identification of authorized
sources, validation and gap closure;
elimination of redundancy; and
alignment to enterprise data
provisioning points
Data standardization, cleansing and storage
► Integrated data model leveraging common
data sources for market and security master
data
► Scalable data model that supports
incremental functional components
► Multiple periods of stored production data
for user access
► Controlled management of standard
reference data, metadata, reconciliation and
data model
Analytics and reporting
► Central function to support internal and
external reporting of treasury risk
► Flexibility to compute and/or import
contractual, behavioral and stressed cash
flows for internal risk or statutory/
regulatory reporting
► Shared stress-testing strategies and
scenario analysis capabilities across risk
categories
► Multi-dimensional reporting with drill-down
capabilities at the most granular level and
ability to view risk measures across line of
business, legal entities, currencies and
counterparties
High-level target state architecture
Traceability
Measurement
system
Treasury, risk
and finance
users
Data management steward
Upstream accountability of data Policy and standards Reconciliation, testing and attestation
Line of business } Provisioning point
Line of business } Provisioning point
Line of business } Provisioning point
Loans
Debt/hedges
Traded products
Deposits
Off-balance
sheet
Treasury data
warehouse
Analytical/
calculation engines
Capital
Planning
ALM
Liquidity
Stress testing
Cash flows
Analytics/
reporting framework
Regulatory
reporting
MIS tools
Data
visualization
Report
generation Personnel
Personnel
Personnel
4321
1
2 3 3 4 4

16. Page 16
Program approach and governance
A structured approach to defining a target state operating model and implementation road map
Iterative target state development methodology
Strategic
architecture
Functional and IT
road map
Gap assessment
Business strategy
Conduct applicability
assessment of
regulations
Tactical
architecture
Inputs
Perform
current state
assessment
Perform
gap assessment
Develop
target state
Establish ongoing
management
operating model
Leading practice
considerations and
benchmarking
BAU target
operating model
Strategic treasury improvement program governance
Strategic
functional and IT
road map
Functional and data
requirements
Target
operating model
► The creation of a program governance structure provides oversight to planning and implementation activities,
including fine-tuning the approach due to regulatory updates and new requirements. It also provides a framework
to evaluate tactical initiatives in terms of the planned strategic architecture limiting rework.
Increased clarity of
regulations and
new regulations
As new
requirements
emerge or
existing ones
change, the
roadmap and
target state
will update
iteratively
throughout
this process.
Outputs
Strategic
architecture
Interim
architecture

17. Page 17
Benefits of strategic balance sheet management
► Allows better management of the firm in this complex environment with
changing competitive and regulatory landscape.
► Facilitates tight integration of key stakeholders, early and all along the decision
making process.
► Makes possible dynamic analysis and reporting across risk factors using
strategic infrastructure.
► Facilitates optimization across entire balance sheet, considering multiple
constraints and strategic goals.
► Enhances alignment of LoB behavior with strategic goals.
► Enhances profitability by optimizing funding and IT costs.
► Enables stronger governance of Balance Sheet decisions and performance
evaluation and enhance accountability by clarifying roles and responsibilities.
► Facilitates key supervisory risk management objectives.

18. Page 18
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This publication contains information in summary form
and is therefore intended for general guidance only. It is
not intended to be a substitute for detailed research or
the exercise of professional judgment. Neither
Ernst & Young LLP nor any other member of the global
Ernst & Young organization can accept any responsibility
for loss occasioned to any person acting or refraining
from action as a result of any material in this publication.
On any specific matter, reference should be made to the
appropriate advisor.