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Handbook of Asset and Liability Management: From models to optimal return strategies by Alexandre Adam

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30

Economic Value Management: The A/L Manager's Optimization Programme Under Economic Capital Constraints and Accounting Constraints

Il ne faut pas mettre tous les œufs dans le même panier.

After the presentation of the regulatory constraints and of the risk free strategy, it is time to present the optimal return strategy.

30.1 POINT OF VIEW OF “TRADITIONAL A/L MANAGERS” AND CRITICISM OF THE MODELS

30.1.1 Questions on economic value management

A/L managers were not kind about using models and economic value indicators in company management. Their point of view mixes different approaches:

  • Incertitude in models is so high that they are not useful.
  • Optimization gives not only one possible strategy but also a full set of strategies where it is not possible to extract “the” optimal strategy.
  • It is not possible to transform the A/L manager into an automatic pilot.

Associated with the fear of economic value, there are numerous fears about the fair value accounting concepts:

  • Fair value accounting puts in evidence the annual performance of the business lines instead of smoothing it over time.
  • Fair value is directly sensitive to small shocks on the market: market positions are put in evidence.

Indeed, if the company income is measured at fair value, this income is computed as a difference of fair values: the income then depends directly on the evolution of the stock of operations, on the margin level of the new contracts and on financial market levels.

Consequently, according to ...

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