WO1999050774A1 - A method for optimizing risk management - Google Patents

A method for optimizing risk management Download PDF

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Publication number
WO1999050774A1
WO1999050774A1 PCT/US1999/005574 US9905574W WO9950774A1 WO 1999050774 A1 WO1999050774 A1 WO 1999050774A1 US 9905574 W US9905574 W US 9905574W WO 9950774 A1 WO9950774 A1 WO 9950774A1
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WO
WIPO (PCT)
Prior art keywords
product
passiva
activa
çay
amount
Prior art date
Application number
PCT/US1999/005574
Other languages
French (fr)
Inventor
Eva Pich Le-Winter
Original Assignee
Pich Le Winter Eva
Priority date (The priority date is an assumption and is not a legal conclusion. Google has not performed a legal analysis and makes no representation as to the accuracy of the date listed.)
Filing date
Publication date
Application filed by Pich Le Winter Eva filed Critical Pich Le Winter Eva
Priority to CA002291287A priority Critical patent/CA2291287A1/en
Priority to AU31861/99A priority patent/AU3186199A/en
Priority to EP99913883A priority patent/EP0985190A1/en
Publication of WO1999050774A1 publication Critical patent/WO1999050774A1/en

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Classifications

    • GPHYSICS
    • G06COMPUTING; CALCULATING OR COUNTING
    • G06QINFORMATION AND COMMUNICATION TECHNOLOGY [ICT] SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES, NOT OTHERWISE PROVIDED FOR
    • G06Q40/00Finance; Insurance; Tax strategies; Processing of corporate or income taxes
    • G06Q40/08Insurance
    • GPHYSICS
    • G06COMPUTING; CALCULATING OR COUNTING
    • G06QINFORMATION AND COMMUNICATION TECHNOLOGY [ICT] SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES, NOT OTHERWISE PROVIDED FOR
    • G06Q40/00Finance; Insurance; Tax strategies; Processing of corporate or income taxes
    • GPHYSICS
    • G06COMPUTING; CALCULATING OR COUNTING
    • G06QINFORMATION AND COMMUNICATION TECHNOLOGY [ICT] SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES, NOT OTHERWISE PROVIDED FOR
    • G06Q40/00Finance; Insurance; Tax strategies; Processing of corporate or income taxes
    • G06Q40/03Credit; Loans; Processing thereof
    • GPHYSICS
    • G06COMPUTING; CALCULATING OR COUNTING
    • G06QINFORMATION AND COMMUNICATION TECHNOLOGY [ICT] SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES, NOT OTHERWISE PROVIDED FOR
    • G06Q40/00Finance; Insurance; Tax strategies; Processing of corporate or income taxes
    • G06Q40/06Asset management; Financial planning or analysis

Definitions

  • This invention relates to ⁇ sk allocation in banking industries and more
  • ⁇ sk Management of ⁇ sk is fundamental to the business of banking and is
  • ncing is used to descnbe the activity of a bank
  • interest passiva product i.e.- savings accounts, or the like, for which the bank pays
  • a bank takes a risk when providing a loan that the
  • an activa product can be financed by the capital from a
  • each of the passiva products may permissibly be financed by each of the passiva products is pre-determined.
  • risk management constraints may 3 permit i.e.- only 25% of the 10% interest rate loans to be financed by the 1% interest
  • the bank can not automatically finance its highest interest-
  • the present invention is a computer system that employs a method for
  • One such array stores information corresponding
  • the distribution array is sorted by the maximum
  • result array which is an array that
  • the passiva and activa product arrays are adjusted to reflect the
  • the distribution array is re-sorted, and the entry with the next highest
  • FIG. 1 depicts the basic structure of the financial management system of the
  • FIG. 2 depicts a passiva product array, in accordance with one embodiment of the invention
  • FIG. 3 depicts an activa product array, in accordance with one embodiment of
  • FIG. 4 depicts a financing mix table, in accordance with one embodiment of
  • FIG. 5 depicts a distribution array, in accordance with one embodiment of the
  • FIG. 6 depicts a flow chart, in accordance with one embodiment of the
  • FIG. 7 depicts a result a ⁇ ay, in accordance with one embodiment of the
  • the present invention optimizes the rate of return of a bank which is
  • the present invention details the creation of arrays, or
  • Computer system 10 is configured to browse a bank's product
  • An activa table 12 and a passiva table 14 are defined by memory buffer
  • Tables 12 and 14 are configured to store information
  • a financing mix table 16 is defined by
  • Table 16 is configured to 6 receive information relating to the bank's financing mix.
  • this information may be entered manually.
  • this information may be entered manually.
  • financing mix information may be automatically browsed by computer
  • Computer system 10 includes an optimizer 20 which is configured to
  • Optimizer 20 includes a
  • distribution table 24 storing distribution data as will be explained in more detail
  • Computer system 10 also includes a result table 22, which is configured
  • financing mix table 16 An example of financing mix table 16 is shown in
  • Computer system 10 utilizes
  • distribution a ⁇ ay 24 An example of distribution a ⁇ ay 24 is shown in Figure 5, as
  • Optimizer 20 performs a series of
  • result table 22 which shows the optimal allocation of capital.
  • result 7 table 22 is shown in Figure 7. The calculations and operations are described later in
  • Figure 2 shows passiva product a ⁇ ay 14, which is created as a result
  • step 106 database 18 for the passiva product information is also shown in step 106 in the flow
  • the passiva product a ⁇ ay 14 contains information on each of the
  • Passiva products which the bank offers to its customers. Passiva products are those
  • the bank uses for capital. For making these deposits and to encourage further
  • the bank typically pays its customers interest based on a percentage of the
  • Figure 2 shows an identifier used to identify (and
  • Figure 3 shows activa product a ⁇ ay 12, which is also created as a
  • Activa product a ⁇ ay 12 contains information on each of the activa
  • Activa products are those products which the bank offers to its customers.
  • the bank typically charges its customers interest based on a percentage of
  • This interest rate is usually significantly higher than the interest
  • Figure 3 shows an
  • Figure 5 shows a distribution a ⁇ ay 24.
  • the distribution a ⁇ ay 24 is a distribution a ⁇ ay 24.
  • financing mix table 16 An example of financing mix table 16 is shown in Figure 4. The
  • financing mix designates what percentage of each activa product may be financed by
  • Each line of the financing mix table 16 contains,
  • the identifier of the activa product the identifier of a passiva product
  • Figure 6 is a flow chart that illustrates the operation of optimizer 20 in
  • computer system 10 begins the optimization process. At steps 104 and 106, 9 computer system 10 retrieves information co ⁇ esponding to activa and passiva
  • computer system 10 sets up distribution a ⁇ ay 24.
  • Distribution a ⁇ ay 24 uses the
  • financing mix table 16 contains an entry for each activa product paired
  • distribution a ⁇ ay 24 contains an
  • distribution a ⁇ ay 24 includes the
  • the interest rate of the passiva product can be found in its co ⁇ esponding
  • delta interest rate is simply found by 10 subtracting the interest rate of the passiva product (which is presumed to be the lower
  • This maximum interest amount represents the profit
  • step 1 12 the
  • distribution a ⁇ ay 24 preferably includes an available capital
  • the available capital amount is ideally designated as the maximum
  • passiva product For instance, if a passiva product, such as 1002 in Figure 2, has
  • Figure 2 is $400,000, then the available capital amount would ideally be designated
  • a ⁇ ay is sorted in descending order based on the maximum interest amount.
  • the first entry in distribution a ⁇ ay 24 is the entry which co ⁇ esponds to the greatest
  • computer system 10 selects the first entry (i.e.- the most
  • the sorting step is not an essential step of the
  • Figure 2 has an available capital amount of $500,000 and an allocation, such as
  • step 130 computer system 10 determines whether distribution a ⁇ ay
  • step 1 14 evaluates the next entry in
  • present method searches the remaining entries for the greatest maximum interest
  • step 1 18 goes to step 1 18 to readjust the entry.
  • step 1 18 goes to step 1 18 to readjust the entry.
  • the entry will be re-sorted in distribution a ⁇ ay 24, utilizing its available interest
  • step 114 of the flow chart at a subsequent time when other selected entries

Abstract

A method for optimizing the return on a bank's capital comprises the creation of a plurality of arrays, comprising a passiva product array, an activa product array, a distribution array and a result array. Passiva products are categories of funds on deposit at the bank; activa products are categories of loans made by the bank. Banking laws and principles of prudent management limit the percentage of funds from a given passiva product which may be applied to a particular activa product. The invention comprises the steps of setting up the arrays (110), selecting the highest interest activa product (112, 114), selecting as much of each passiva product as possible to be invested in this activa product (116 through 128), and repeating these steps (130, 118) until all funds from passiva products have been allocated to activa products (132).

Description

1 A METHOD FOR OPTIMIZING RISK MANAGEMENT
Field of the Invention
This invention relates to πsk allocation in banking industries and more
specifically to a method for optimizing the rate of return based on a bank's deposit
and loan accounts
Background of the Invention
Management of πsk is fundamental to the business of banking and is
an essential part of a bank's economic strategy Banks face vaπous nsks and the
success of a bank's operations relies on its ability to optimize the rates of return for
the capital available to the bank based on pre-determined πsk management
constraints
In the normal course of banking operations, a bank's earnings depend
on, among other things, the difference m interest rates between that which the bank
collects from its activa products (a product is the aggregate of similar accounts, I e -
all residential loan accounts with an interest rate of 10% might collectively be referred
to as a single loan product, or likewise for loans having similar πsk characteπstics)
and that paid by the bank via the passiva products it uses to finance the activa
products As defined m the text "Economic Terminology" by authors Renner and
Sachs, which is incorporated by reference herein, "activa" is equivalent to the term
'loan function', and "passiva" is equivalent to the term 'deposit function'
Additionally, the use of the term "financing" is used to descnbe the activity of a bank
in using deposit functions to sell loan functions 2 Ideally, a bank would simply allocate the capital from its lowest
interest passiva product (i.e.- savings accounts, or the like, for which the bank pays
the customer, for example, 1 % interest) to finance its highest interest activa product
(i.e.- loan accounts, or the like, for which the bank collects, for example, 10%
interest). In this situation, the bank would make the most profit because the interest
collected by the bank would maximally exceed the interest paid. However, this
method is not typically possible because of risk management constraints imposed
upon the bank. These risk management constraints require the bank to use capital in
such a way as to minimize (or at least lessen to acceptable levels) the risks to the
capital.
For instance, a bank takes a risk when providing a loan that the
customer receiving it will default on the loan. If such a default takes place, the funds
used to finance that loan is lost or may only be partially recoverable. Since the funds
used to finance that loan originated as capital in the passiva accounts belonging
presumably to other customers of the bank, a default may adversely affect the passiva
account holder. In order to protect against this situation, both a governmental entity
and/or the bank's management can impose constraints on the way in which the bank
can finance the loans it makes. Typically, the constraints state which passiva
products, and what percentage of each passiva product, can be used to finance each
activa product. In this manner, an activa product can be financed by the capital from a
number of different passiva products, and the percentage of the activa product which
may permissibly be financed by each of the passiva products is pre-determined.
Extending the example of the previous paragraph, risk management constraints may 3 permit i.e.- only 25% of the 10% interest rate loans to be financed by the 1% interest
rate savings accounts, thus minimizing the risk to the capital in the 1 % savings
accounts.
These pre-determined limits potentially conflict with the bank's profit-
maximizing objective. The bank can not automatically finance its highest interest-
paying activa products with its lowest interest-bearing passiva products. In order to
operate optimally, however, a bank must utilize a method which enables it to
maximize its profit while staying within the risk management constraints imposed
upon it.
Therefore, there exists a need for a method which ensures that a bank
finances its activa products with capital from passiva products so as to maximize
profits while still operating within any imposed risk management constraints.
Summary of the Invention
The present invention is a computer system that employs a method for
optimizing the rate of return of a bank. Several arrays are created in order to
efficiently tabulate rates of return to be achieved by allocating capital from passiva
products to finance activa products. One such array stores information corresponding
to passiva products, another stores information corresponding to activa products.
Utilizing a financing mix, which details what percentage of each activa product may
be financed by each passiva product, a distribution array is created which preferably
stores each activa product, the passiva products associated with each activa product,
the difference in interest rates between each product, the maximum capital from each 4 passiva product which can permissibly be utilized to finance each activa product, and
the profit to be made by the bank if it allocates said allowable maximum capital. In
one embodiment of the invention, the distribution array is sorted by the maximum
interest amount column and the entry with the highest maximum interest amount is
analyzed first. For said entry, a comparison is made to determine whether the capital
required to achieve the highest maximum interest amount is actually available in the
passiva product. If it is, the entry is added to a result array, which is an array that
represents the optimal allocation of capital. Said entry is then deleted from the
distribution array, the passiva and activa product arrays are adjusted to reflect the
allocated capital, and the distribution array is re-sorted. These steps are repeated until
there is a complete allocation of the capital. If the capital required to achieve the
highest maximum interest amount is not actually available in the passiva product, then
the maximum capital amount for the entry is adjusted to equal the available interest
amount, the distribution array is re-sorted, and the entry with the next highest
maximum interest amount is analyzed.
Brief Description of the Drawings
These and other objects, features and advantages of the invention will
be more readily apparent from the following descriptions of the preferred embodiment
of the invention in which:
FIG. 1 depicts the basic structure of the financial management system of the
present invention, in accordance with one embodiment of the invention;
FIG. 2 depicts a passiva product array, in accordance with one embodiment of the invention;
FIG. 3 depicts an activa product array, in accordance with one embodiment of
the invention;
FIG. 4 depicts a financing mix table, in accordance with one embodiment of
the invention;
FIG. 5 depicts a distribution array, in accordance with one embodiment of the
invention;
FIG. 6 depicts a flow chart, in accordance with one embodiment of the
invention;
FIG. 7 depicts a result aπay, in accordance with one embodiment of the
invention.
Detailed Description of the Invention
The present invention optimizes the rate of return of a bank which is
operating under risk management constraints, by providing a method which can be
utilized by the bank to ensure that it is allocating the capital from its passiva products
in the most profitable way. The present invention details the creation of arrays, or
tables, which organize and tabulate product information to optimize its use.
Computer system 10 is configured to browse a bank's product
database. An activa table 12 and a passiva table 14 are defined by memory buffer
spaces in computer system 10. Tables 12 and 14 are configured to store information
provided by a bank's product database 18. A financing mix table 16 is defined by
another memory buffer space in computer system 10. Table 16 is configured to 6 receive information relating to the bank's financing mix. In one embodiment of the
invention, this information may be entered manually. In another embodiment of the
invention, financing mix information may be automatically browsed by computer
system 10. Computer system 10 includes an optimizer 20 which is configured to
receive information from tables 12, 14 and 16 respectively. Optimizer 20 includes a
distribution table 24 storing distribution data as will be explained in more detail
hereinafter. Computer system 10 also includes a result table 22, which is configured
to store optimized allocations of activa and passiva accounts, which is accessible to
user of computer system 10, for example, via a display screen or a printer.
During operation, as shown in the figure, the bank's product database
18 is examined by the software browser of computer system 10. The system searches
database 18 and enters into activa table 12 and passiva table 14 those activa and
passiva products, respectively, which it finds. Each table would therefore have
separate entries for each product offered by the bank. Financing mix table 16, which
contains information obtainable from a manual definition of the financing mix, details
the constraints the bank operates under when allocating capital from its passiva
products to its activa products. An example of financing mix table 16 is shown in
Figure 4, as will be explained in more detail hereinafter. Computer system 10 utilizes
activa product array 12, passiva product array 14 and financing mix table 16 to set up
distribution aπay 24. An example of distribution aπay 24 is shown in Figure 5, as
will be explained in more detail hereinafter. Optimizer 20 performs a series of
calculations and operations on the entries in distribution array 24 in order to produce
result table 22, which shows the optimal allocation of capital. An example of result 7 table 22 is shown in Figure 7. The calculations and operations are described later in
this section and include steps 112 through 130 in the flow chart illustrated in Figure 6.
Figure 2 shows passiva product aπay 14, which is created as a result
of computer system's 10 search of bank's product database 18. The search of
database 18 for the passiva product information is also shown in step 106 in the flow
chart in Figure 6. The passiva product aπay 14 contains information on each of the
passiva products which the bank offers to its customers. Passiva products are those
products which constitute assets for the bank. Examples of passiva products are
savings and checking accounts, because the bank's customers deposit the funds which
the bank uses for capital. For making these deposits and to encourage further
deposits, the bank typically pays its customers interest based on a percentage of the
amount deposited in the bank. Figure 2 shows an identifier used to identify (and
distinguish between) specific passiva products, the monetary value, or capital,
associated with each passiva product, the interest rate associated with each passiva
product and the available interest amount associated with each passiva product.
Figure 3 shows activa product aπay 12, which is also created as a
result of computer system's 10 search of the bank's product database 18. The search
of database 18 for the activa product information is also shown in step 104 of the flow
chart in Figure 6. Activa product aπay 12 contains information on each of the activa
products which the bank offers to its customers. Activa products are those products
which constitute liabilities for the bank. Examples of activa products are loans made
by the bank, because the bank is owed the funds which it has loaned out. For making these loans, the bank typically charges its customers interest based on a percentage of
the amount loaned. This interest rate is usually significantly higher than the interest
rate which the bank pays to its passiva product customers. Figure 3 shows an
identifier used to identify (and distinguish between) specific activa products, the
monetary value, or capital, associated with each activa product, the interest rate
associated with each activa product and the annual interest associated with each activa
product.
Figure 5 shows a distribution aπay 24. The distribution aπay 24
incorporates information from both passiva product aπay 14 and activa product aπay
12, as well as information from other sources. One such other source is financing
mix table 16. An example of financing mix table 16 is shown in Figure 4. The
financing mix designates what percentage of each activa product may be financed by
each passiva product. These percentages are imposed on the bank in order to lessen
the risk to the passiva products which the bank is utilizing to finance its activa
products. Such risk management constraints can be imposed by a governmental entity
or by the bank's own management. Each line of the financing mix table 16 contains,
at a minimum, the identifier of the activa product, the identifier of a passiva product
which has been pre-determined as eligible to finance that particular activa product,
and the maximum percentage of the activa product which may be financed by that
particular passiva product.
Figure 6 is a flow chart that illustrates the operation of optimizer 20 in
computer system 10, in accordance with one embodiment of the invention. At step
102, computer system 10 begins the optimization process. At steps 104 and 106, 9 computer system 10 retrieves information coπesponding to activa and passiva
products from bank's product database 18 as discussed before. At step 108,
information is retrieved from the financing mix table in order to set up the distribution
aπay 24. Specifically, the maximum percentage of the activa product which may be
financed by that particular passiva product is utilized in the distribution aπay. At step
110, computer system 10 sets up distribution aπay 24. Distribution aπay 24 uses the
same activa and passiva product pairings as the financing mix table 16. In other
words, just as financing mix table 16 contains an entry for each activa product paired
with a passiva product which is eligible to finance it, distribution aπay 24 contains an
entry coπesponding to the same product pair. For each such pair in distribution aπay
24, the maximum percentage specified in financing mix table 16 is multiplied by the
monetary value of the activa product. This amount, also known as the maximum
capital amount, represents the greatest permissible contribution which can be made
from a particular passiva product to a particular activa product under the risk
management constraints, not taking into consideration the actual capital which is
available in the passiva account or the desirability of making the contribution.
In one embodiment of the invention, distribution aπay 24 includes the
difference between the interest rates of the activa product and the passiva product of
each pair. The interest rate of the passiva product can be found in its coπesponding
entry in passiva product aπay 14. Similarly, the interest rate of the activa product can
be found in its coπesponding entry in activa product aπay 12. The difference
between these two interest rates is termed delta interest rate and is simply found by 10 subtracting the interest rate of the passiva product (which is presumed to be the lower
of the two interest rates) from the interest rate of the activa product. Multiplying the
delta interest rate by the maximum capital amount for each entry, the maximum
interest amount is obtained. This maximum interest amount represents the profit
which the bank would earn if it financed the activa product with the maximum
amount of capital from the passiva product permitted by the risk management
constraints imposed on the bank. In one embodiment of the invention, at step 1 12, the
maximum interest amount is sorted in distribution aπay 24. However, many times
this maximum interest amount can not be realized because the maximum capital
amount from the coπesponding passiva product is not available.
Thus, distribution aπay 24 preferably includes an available capital
amount and an available interest amount coπesponding to each product pair. The
available capital amount would reflect the actual monetary value of the passiva
product, and the available interest amount would represent the profit which the bank
would earn if it financed the activa product with the actual monetary value of the
passiva product. The available capital amount is ideally designated as the maximum
capital amount of the same entry, not to exceed the actual monetary value of the
passiva product. For instance, if a passiva product, such as 1002 in Figure 2, has
capital of $1,000,000 and the maximum capital amount which can permissibly be
allocated from that passiva product to a particular activa product, such as 1000 in
Figure 2, is $400,000, then the available capital amount would ideally be designated
as $400,000. Otherwise, if a passiva product, such as 1003 in Figure 2, only has
capital of $200,000 and the maximum capital amount which can permissibly be 1 1 allocated from that passiva product to a particular activa product, such as 1000 in
Figure 2, is $400,000, then the available capital amount would be designated as
$200,000 (so as not to exceed the actual monetary value of the passiva product).
Once distribution aπay 24 contains an entry for each activa product
paired with each passiva product which is eligible to finance it, the entries are
advantageously sorted. In accordance with one embodiment of the invention, the
aπay is sorted in descending order based on the maximum interest amount. This
method of sorting is shown in step 112 of the flow chart in Figure 6. In this manner,
the first entry in distribution aπay 24 is the entry which coπesponds to the greatest
profit which the bank could potentially earn on any one allocation of funds. The
second entry in the distribution aπay would be the entry which corresponds to the
second greatest profit, and so on until the last entry which coπesponds to the entry
offering the least profit to the bank. After sorting all of the entries in distribution
aπay 24, at step 1 14, computer system 10 selects the first entry (i.e.- the most
profitable) in order to evaluate the desirability of making the allocation designated by
that entry.
It should be noted that the sorting step is not an essential step of the
present invention. It is also possible for the program to select the most profitable
entry without first sorting all of the entries in the distribution aπay. The sorting step
does, however, allow for an easier and more efficient selection of the entries to be
evaluated.
Once an entry is selected for evaluation, the maximum capital amount
for that entry is compared to the actual monetary value of the coπesponding passiva 12 product at decision step 1 16. If the actual monetary value of the passiva product is
equal to or exceeds the maximum capital amount for that entry, this signifies that
enough capital exists in the passiva product in order to make the desired allocation,
thus rendering the highest profit. Once the allocation is made, this entry is then
deleted from distribution aπay 24, as illustrated by step 120 of the flow chart in
Figure 6, and is added to result array 22, as illustrated by step 122 of the flow chart.
An example of result aπay 22 is shown in Figure 7. Result aπay 22, when complete,
provides the user of the system described in the present invention with the optimal
way to allocate the bank's capital.
After a selected entry has been evaluated and has been deleted from
distribution aπay 24 and added to result aπay 22, passiva and activa product aπays,
14 and 12, must be adjusted to reflect the allocation of the capital. In passiva product
aπay 14, the monetary value of the particular passiva product which was the subject
of the evaluation is reduced by an amount equal to the allocation at step 126. This
insures that, in subsequent evaluations of different entries, the maximum capital
amounts are compared to the correct monetary values of the passiva products, not the
original monetary values before the allocations were made. Similarly, in activa
product aπay 12, the capital coπesponding to the activa product which was the
subject of the evaluation is reduced, at step 124, by the same amount, also to insure
that subsequent comparisons are made to the correct monetary value.
If distribution aπay 24 also includes the available capital amounts and
the available interest amounts, then it may be desirable to adjust these items. For
instance, if the allocation of funds by one entry would reduce the available capital 13 amount in another entry, it is advantageous to reflect the change in the available
capital amount to insure that subsequent comparisons to the available capital are made
to the coπect amount. For instance, if a particular passiva product, such as 1001 in
Figure 2, has an available capital amount of $500,000 and an allocation, such as
2000/1001 in Figure 7, is made equaling $400,000, then any other entries in the
distribution aπay 24 which involve the same passiva product, such as 1000/1001 in
Figure 5, must be adjusted to show that the available capital amount is only $100,000.
In this example, no adjustment was necessary because the available capital amount for
entry 1000/1001 in Figure 5 was already only $100,000. If, however, the available
capital amount for entry 1000/1001 in Figure 5 had originally been $200,000, this
value would have been reduced to $100,000 to reflect the allocated capital. This
adjustment is illustrated by step 128 of the flow chart in Figure 6.
At step 130, computer system 10 determines whether distribution aπay
24 includes additional entries. If so, it goes to step 1 14 and evaluates the next entry in
distribution array 24. This next entry is the entry coπesponding to the next greatest
profit which can potentially be realized by the bank, and if distribution aπay 24 has
been sorted, will be the first entry in distribution aπay 24 after the deletion of the
previously allocated entry. If distribution aπay 24 has not been sorted, then the
present method searches the remaining entries for the greatest maximum interest
amount. Once selected, a similar evaluation is made upon the entry as was made upon
prior entries, i.e.- the maximum capital amount is compared to the available capital
amount to determine whether there exists in the passiva product sufficient capital to
make the desired allocation. If there is sufficient capital, the allocation is made, the 14 entry is deleted from distribution aπay 24 and added to result aπay 22, and the
program returns to distribution array 24 to make a further selection. This process is
repeated until allocations have been made so as to provide financing to all of the
activa products. Once completed, result aπay 22 will instruct the bank how to
allocate the capital from its passiva products so as to optimize it profits. Step 132 of
the flow chart in Figure 6 illustrates the completion of result aπay 22, whereupon step
134 illustrates the completion of the program.
The described method deviates slightly when, upon evaluating the
selected entry from distribution aπay 24, it is determined that the actual available
capital amount does not equal or exceed the maximum capital amount for that entry at
decision step 1 16. In this case, the passiva product does not have sufficient funds to
make the desired, most-profitable allocation. When this occurs, computer system 10
goes to step 1 18 to readjust the entry. In one embodiment of the invention, at step
118, the entry will be re-sorted in distribution aπay 24, utilizing its available interest
amount rather than its maximum interest amount. The re-calculation of the maximum
interest amount by multiplying the difference in interest rates by the available capital
amount is illustrated by step 118 of the flowchart in Figure 6. Therefore, the entry
would not be evaluated when first selected, but would be re-selected , in accordance
with step 114 of the flow chart, at a subsequent time when other selected entries
having greater profits have been successfully allocated.
Once all entries in the distribution aπay have been evaluated in
accordance with steps 114 - 130, system 10 goes to step 132 to complete result aπay
22 and the optimization process at step 134. 15 While there has been shown and described a particular embodiment of
the invention, it will be obvious to those skilled in the art that changes and
modification can be made therein without departing from the invention, and therefore,
the appended claims shall be understood to cover all such changes and modifications
as fall within the true spirit and scope of the invention.

Claims

16 We claim:
1. A method for optimizing a rate of return based on a bank's
capital and loan products, comprising:
(a) creating a plurality of aπays, comprising a passiva product aπay, an
activa product aπay, a distribution aπay and a result aπay;
(b) each said passiva product aπay signifying a plurality of passiva
products, each said passiva product having a monetary value and an interest rate
associated with it;
(c) each said activa product aπay signifying a plurality of activa products,
each said activa product having a monetary value and an interest rate associated with
it;
(d) assigning to each said activa product a plurality of eligible passiva
products from said passiva product aπay, and a pre-determined maximum percentage
of said activa product which may be financed by each of said eligible passiva
products;
(e) for each said activa product, entering on said distribution aπay a single
entry for each said eligible passiva product;
(f) calculating a maximum capital amount, a maximum interest amount
and an available interest amount for each assignment made in said assigning step;
(g) selecting from said distribution aπay the largest said maximum interest
amount;
(h) if said monetary value of said eligible passiva product is not less than
said maximum capital amount for said selected single entry, deleting said selected 17 single entry from the distribution aπay and adding it to said result aπay, subtracting
said maximum capital amount for said selected single entry from said monetary value
of said passiva product in said passiva product aπay and from said monetary value of
said activa product in said activa aπay;
(i) if said monetary value of said eligible passiva product is less than said
maximum capital amount for said selected single entry, adjusting said profit amount
of said selected single entry by multiplying a difference in said interest rates between
said activa product and said eligible passiva product by said monetary value of said
eligible passiva product;
(j) repeating said steps (g) - (i).
2. The method of claim 1, wherein calculating said maximum
capital amount further comprises multiplying said monetary value of said activa
product by said pre-determined maximum percentage of said activa product which
may be financed by each of said eligible passiva products.
3. The method of claim 1, wherein calculating said maximum
interest amount further comprises multiplying said maximum capital amount by said
difference in said interest rates between each said activa product and each of its said
eligible passiva products;
4. The method of claim 1, wherein calculating said available
interest amount further comprises multiplying said monetary value of said eligible 18 passiva product by said difference in said interest rates between said activa product
and said eligible passiva product.
5. The method of claim 1, further comprising, after step (f),
entering in said distribution aπay said maximum capital amount, said maximum
interest amount and said available interest amount.
6. The method of claim 1, further comprising, after step (f),
entering in said distribution aπay said monetary value of said eligible passiva product.
7. The method of claim 1, further comprising, after step (f),
entering in said distribution aπay said monetary value of said eligible passiva product,
and after step (h), subtracting said maximum capital amount from said monetary value
in each said single entry in said distribution aπay having the same said eligible
passiva product.
8. The method of claim 1, further comprising sorting said single
entries in said distribution aπay prior to each selection step.
9. The method of claim 1, further comprising repeating said
selecting step until said monetary value for all said activa products equals zero.
PCT/US1999/005574 1998-03-27 1999-03-16 A method for optimizing risk management WO1999050774A1 (en)

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