Bank asset and liability management under uncertainty

This study presents a multiperiod stochastic linear simple recourse model for asset and liability management in banking. The model determines the portfolio of assets and liabilities over the planning horizon given a set of deterministic rates of returns of investments and costs of borrowings, and a set of random outstanding deposit levels, liquidity and total reserve requirements with a given discrete probability distribution. The intention is to develop an optimization tool to assure sustained profitability and good management of risks while balancing sources and uses of funds to meet legal and policy requirements, and satisfy withdrawal requests of depositors on time and in full. Effects of changes in bank policies and banking regulations, environmental factors, potential risks, additional decision alternatives and constraints can be handled and evaluated by the model. Therefore, it can be used both for planning and analysis. The model is verified using a Turkish sample bank's data over the period 1987–1990 and several sensitivity analyses are reported. As the model takes into account the stochastic behaviour of crucial uncontrollable variables, the results of the model can be deemed more realistic compared with the deterministic model.