Budgeting Capital and Liquidity Planning

Overview

A German bank, part of a French-based multinational financial services company, was required to implement group-wide software for interest rate and liquidity risk monitoring and management. The objective was to ensure regulatory compliance, risk-informed decision-making, and alignment with group-wide financial planning processes.

Aspect Advisory was engaged to lead the technical implementation, integrate liquidity and interest rate scenario modeling, and develop a Fund Transfer Pricing (FTP) model to assess the profitability of different financial products.

Solution

Aspect Advisory developed an automated financial modeling framework that enables the bank to effectively monitor liquidity and capital risks while aligning with both regulatory and internal economic perspectives.

Key Solution Components:

Automated Balance Sheet & Income Statement Modeling – Developed a dynamic model that reflects risk-adjusted capital metrics, material risk indicators, and profitability ratios.
Liquidity & Interest Rate Risk Scenario Modeling – Designed models to assess multiple economic scenarios and their impact on capital and liquidity planning.
Integration of Key Risk Metrics – Incorporated Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) to ensure alignment between regulatory requirements and economic perspectives.
Fund Transfer Pricing (FTP) Model Development – Established a comprehensive FTP framework to analyze the profitability of financial products and business segments.
Regulatory & Economic Decision Alignment – Ensured that capital and liquidity planning decisions are transparent, data-driven, and compliant with global regulatory requirements.

Results & Impact

The implementation of the automated capital and liquidity planning model delivered enhanced financial forecasting capabilities and group-wide consistency in reporting and planning.

Granular and Accurate Financial Planning – The model provided a structured and accurate approach to forecasting balance sheet and income statement movements.
Regulatory & Economic Decision Alignment – Ensured a clear linkage between regulatory compliance and internal economic strategies.
Improved Transparency for Internal & External Stakeholders – Enabled better visibility of liquidity risks, capital allocation, and profitability metrics.
Group-Wide Standardisation – Ensured the bank’s financial planning and reporting practices align with group-wide methodologies for international comparability.

Strategic Themes Addressed

Treasury & Asset-Liability Management – Strengthening capital allocation and liquidity risk management.
Regulatory Reporting & Compliance – Ensuring adherence to liquidity risk regulations (LCR & NSFR).
Profitability & Risk-Based Decision Making – Using FTP modeling to drive financial product profitability analysis.

Key Skill Sets Utilised

Financial Statement Modeling – Designing dynamic forecasting models for income statements and balance sheets.
Risk Metrics & Scenario Analysis – Implementing liquidity and interest rate stress testing.
Profitability Analysis (Equity & FTP Models) – Assessing the risk-adjusted profitability of financial products.
Regulatory Compliance & Reporting – Integrating LCR, NSFR, and capital adequacy ratios into financial planning models.

Business Areas Impacted

Treasury & Liquidity Management – Improved capital and liquidity risk monitoring and decision-making.
Asset-Liability Management (ALM) – Enhanced alignment between risk-based capital strategies and business planning.
Regulatory Reporting – Ensured group-wide compliance with international liquidity and capital risk regulations.

Insights: Key Learnings & Industry Implications

1. The Importance of Predictive Capital & Liquidity Planning

Accurate forecasting of capital and liquidity needs is crucial for:
Effective capital allocation and investment planning.
Ensuring resilience in economic downturns and financial crises.
Meeting regulatory requirements and stakeholder expectations.

2. Transparency in Capital & Liquidity Planning

As financial institutions face increasing regulatory scrutiny, banks must:
Implement standardised planning models that enhance internal transparency.
Ensure clear reporting frameworks that fulfill the needs of both internal and external stakeholders.
Align regulatory and economic decision-making to maintain financial stability.

3. The Future of Liquidity & Capital Risk Management

AI-Driven Financial Forecasting – Machine learning and predictive analytics will enhance liquidity risk modeling.
Real-Time Risk Monitoring – Banks will implement automated dashboards for continuous capital and liquidity tracking.
Harmonisation of Regulatory & Economic Planning – Institutions will adopt integrated frameworks to ensure seamless alignment of business strategy and compliance requirements.

Conclusion

By implementing an automated capital and liquidity planning framework, Aspect Advisory enabled the German bank to enhance financial transparency, improve risk-based decision-making, and ensure compliance with global regulatory standards.

This transformation provides the bank with a robust, forward-looking planning tool that aligns capital allocation, risk appetite, and liquidity management with both regulatory expectations and strategic business goals.