A Mathematical Model for Bank Asset and Liability Portfolio System

Abstract

A mathematical model for Asset and Liability Portfolio System (ALPS) was developed and analyzed on banking system using partial differential equation technique. The dynamic nature of decision making support for asset and liability management was presented so as to choose a realistic result. The model was tested with the use of maple17 software which shows that commercial banks can manage their assets and liabilities through cash flow of deposits and loans. Setting the bank's initial position, and different deposit flow situations, the result revealed that people are discouraged to save their money when the interest rate of deposit is low. To the contrary, people are encouraged to take loan when the interest rate is so low. Banks should effectively oversee the asset and liability portfolio process for proper accountability of capitals. The result of stress-testing shows the kind of dynamic processes taking position in commercial banks. In this case, it is possible for managers to adjust bank liabilities to earn assets as much as possible.