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A Method for Strategic Asset-Liability Management with an Application to the Federal Home Loan Bank of New York

Leonard N. Stern School of Business, New York University, New York, New York
Leonard N. Stern School of Business, New York University, New York, New York
Leonard N. Stern School of Business, New York University, New York, New York
Dime Bancorp, New York, New York

Strategic asset-liability management is a primary concern in today's banking environment. In this paper, we present a methodology to assist in the process of asset-liability selection in a stochastic interest rate environment. In our approach, a quadratic optimizer is embedded in a simulation model and used to generate patterns of dividends, market value and duration of capital, for randomly generated interest rate scenarios. This approach can be used to formulate, test, and refine asset-liability strategies. We present results of applying this methodology to data from the Federal Home Loan Bank of New York.

Subject classifications: finance; asset-liability management; financial institutions; banks.

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