Because the model captures the balance-sheet as a whole, the profit and loss or risk impact of changing any variable is immediately visible. The model readily quantifies the impact of the following
- Lending for different maturities
- Pricing for different LTV bands
- Changes of regulatory risk weightings
- Interest only versus repayment lending
- Cost of the pipeline
- Setting ERCs at a level that is fair both to the firm and to customers
- If the asset price is known, solving for the optimal funding sources and price
- Evaluating the costs and benefits of funding shorter or longer
- Altering target RoC
- Altering PD assumptions
- Allowing for overheads
- Calculating the cost of holding liquidity
- Seeing the impact of altering the firm’s liquidity targets
- Optimising the composition of the liquidity portfolio
This tool gives lending firms a rigorous framework for the valuation of new business. The model is driven by a clear and powerful logic that can be understood by staff at all levels, thus allowing informed management and oversight of the business.
