1 July 2015

2 July 2015

XA Bank Switzerland is a branch of AXA Bank Europe, which is located in Brussels.

In order to leverage synergies, a central treasury management in Brussels has been

established. The central treasury team is not only responsible for the asset side

liquidity management, but also responsible for the liability side liquidity management for both

the head office as well as the branches.

The branch needs liquidity in order to meet the day-to-day payment settlement. Hence to

optimize the liquidity management and ensure sufficient funding sources, the branch is

conducting a study regarding assessing all daily cash inflows and outflows of its deposit

portfolio as well as the impact on the liquidity risk management.

Liquidity Risk at AXA Bank Europe Switzerland and rationale for liquidity risk management

Liability-side liquidity risk

Liquidity risk arises from the liability-side when the deposit accounts issued by the bank have

a high degree of withdrawal risk. The bank normally meets withdrawal requests with

immediate cash payment, but they have the legal right to delay, which provides important

withdrawal risk control to the liquidity management.

In 2009 the AXA Bank Switzerland's balance sheet has one year of term deposit and a large

amount of short-term 2in1 deposit liabilities. The term deposit contracts are one year of fixed-

maturity instruments with deposit values fewer than 5 millions for one depositor. The bank

knows the exact scheduling of interest and principal payments to depositors holding such

deposit claims, since these payments are contractually specified. As such, the bank can

directly control fund inflows and outflows by maturities of the time deposits.

2in1 deposit accounts issued by the bank have a high degree of withdrawal risk due to the fact

that such deposit accounts are contracts that give the holders the right to put their claims back

to the AXA Bank Switzerland on any given day and demand payment of CHF 50'0001 per

month of their deposit claims. For amounts above CHF 50'000 a notice is required one month

in advance. It means an individual 2in1 deposit account holder with a balance of CHF 50'000

can demand cash to be paid when the depositor has exceptional liquidity needs. But, it doesn't

means that the bank is absolutely powerless to mitigate deposit withdrawals, especially if

value day for payments is designed for daily payment process. Finally, this allows the local

treasurer indirectly control the withdrawal risk on such accounts.

Table 1 shows the aggregate balance sheet of the assets and liabilities of AXA Bank

Switzerland, February 2009. As seen in this table, total deposits are 78 percent of total

liabilities (with 49 percent 2in1 deposits). By comparison, cash assets are 51 percent of total

assets.

1 In the situation, an individual 2in1 account holder can withdraw an amount of CHF 20'000 immediately via

internet-banking at any time. It means the limit setting of amount CHF 50'000 per calendar month is not actual

A

3 July 2015

TABLE 1 Asset and Liabilities of AXA Bank Switzerland, February 2009 (in CHF)

Assets Liabilities

Total cash assets 13'058'395.80 19'869'563.96 (12'632'444.21 of 2in1) Total deposits (2in1+TD)=0.78 total liabilities

Total loans Total borrowings (loans)

Other assets Other liabilities

Total assets 25'579'766.79 25'579'766.79 Total liabilities

In the bank business growing phase, we know that normally only a small proportion of the

deposits will be withdrawn on any given day. Most deposits act as consumer core deposits on

a day-by-day basis, providing a relatively stable of deposit funds for the bank. Moreover,

deposit withdrawals may in part be offset by the inflow of new deposits (and income

generated from the bank's balance-sheet activities. The withdrawals value of deposits are also

somewhat predictable in that, the settlement of payment is controlled by defined value day

related to Switzerland SIC clearing and Post Finance transaction systems.

Describe the daily cash inflows and outflows on the 2in1 deposit accounts on a given banking day

Cash inflow

o New deposits inflows processed via SIC and Post Finance

o Official funding of existing accounts processed via SIC

Cash outflow

o 2in1 deposit withdrawals processed via SIC, cards, bancomat,

tancomat, pointofsales and Post Finance processed via EZAG

Upon value day the incoming via SIC and outgoing payments via SIC, bancomat, tancomat,

pointofsales are automatically lodged in the Finnova system throughout the day while the

intraday payment limits currently not used to control the aggregated exposure resulting from

processing payments in advance of receipt of cover. Availability is restricted to the delivered

daily report L80 that shows up all of the SIC aggregated daily payment data and net payment

update.

4 July 2015

Report L80: Example

The daily incoming and outgoing payments on value day via Post Finance (ESR, EGAV and

(EZAG) are automatically lodged in the Finnova system once in the morning and outgoing

payments (EZAG) also once in the afternoon. The aggregated incoming and outgoing

payments are checked in Post Finance E-Finance and local treasury manually releases

outgoing payment via EZAG file.

Note the daily payment settlement covers the payments on the bank deposit accounts in 2in1

and term deposit.

Describe how to monitor all daily completed inflows and outflows processing in the systems on a given banking day and net payment updates

The local treasury unit monitors daily settlement payments using the local systems via the

Mint I24 message tool, which shows up real time net payment updates of SIC clearing

account. (See more details below).

Finnova interface Mint system

SIC real time cleared inflows in Mint during day

SIC real time cleared outflows in Mint during day

SIC real time cleared balance during day

5 July 2015

The net payment update will show up in the Mint system during the day. The local

treasurer has to make sure that the sum of the payments across collected incoming and

outgoing amounts matches the expected payments. Having a payment position is not a

normal situation (e.g. excess payment), the local treasurer has to investigate all such cases

for accuracy in Finnova for that can be generated as a result of technical problems even if

they fit under the liquidity needs.

Finnova delivered cash payment transaction files of Post Finance in the morning

Inflow files: ESR, EGA-V

Outflow file: EZAG

6 July 2015

The local treasury checks aggregated incoming and outgoing payments in Post Finance E-

Finance. Before 14:30 pm of the day the outgoing payment via EZAG files is manually

released by treasury. In addition, file report that shows up all of the incoming and outgoing

payments from Finnova system in the early morning is in use (See screen above).

Define the major ways to manage bank's daily liquidity needs

Calculate the net deposit flow based on the systems and procedures

On a daily basis, the local treasurer will review all incoming and outgoing payments for

intraday liquidity needs with appropriate details in Finnova and Post Finance. Use the Mint

real time net payment update tool and delivered Post Finance payment files and investigate

them in the Finnova in order to check the latest payment data found under the 2in1 accounts

(See detail screens below) and see how these got processed. Calculate the expected net

deposit payment before 12:00 pm as business process procedures.

7 July 2015

Screens of SIC incoming and outgoing payments in Finnova

8 July 2015

Screen of Post Finance incoming and outgoing payments in Finnova

Management sets the threshold limit depending upon the product types and one calculates the corresponding liquidity need probability based on the characteristics of the daily net payments

The bank should clearly articulate a liquidity risk tolerance that is appropriate for its business

strategy and conduct probability distribution on a regular basis for a bank-specific design to

identify sources of potential liquidity strain and to ensure that current exposures remain in

accordance with a bank's established liquidity risk tolerance (limit)

Calculate the distribution of the daily incoming and outgoing payments and the probability that the sum of the outgoing payments exceeds a certain limit

Local treasury unit must monitor the resulting net deposit withdrawals. Specifically, over

time, we can normally predict-with a good degree of accuracy-the probability distribution of

net deposit drains (the difference between deposit withdrawals and deposit additions) on any

given normal banking day. Apart from predictable daily seasonality to deposit flows, there are

other seasonal variations, many of which are, to a greater or lesser degree, predictable. For

example, many retail banks face above average deposit outflows around the end of the year

and in the summer (due to Christmas and the vacation season).

TABLE 2 shows the intraday net payment of 2in1 and Term Deposit of AXA Bank

Switzerland, February 2009. As seen in the following FIGURE a1, for AXA Bank

Switzerland, a bank is to be growing, it must have a mean or average net deposit payment,

such that new deposit funds more than offset deposit withdrawals. Thus, the peak of the net

9 July 2015

payment probability distribution would be at a point to the right of zero. See in FIGURE a2

the Percent 0.03 of total liability (where the distribution of net payment is peaked at

777'918.38/25'579'766.79 =0.03 percent of total B/S liability) the bank is receiving net cash

inflows with the highest probability.

TABLE 2 Net payment distributions generated from all intraday net deposit payment of AXA Bank Europe,

Switzerland, February 2009 (in CHF)

Intraday Net Payment of 2in1 and TD accounts

From

2009/2/1

Payment Date

=Value Date SIC Thereof SIC Thereof

SIC Net

payment 2in1

+TD Deposits

PostFinance Post Finance

Net payment

2in1+TD

Deposits

Total Intraday

Net deposit

payment

Total Incoming a+b+c

a.Total

balance last

day

b.Treasury

Deal

c.PC

Transfer

2in1 +TD

Deposits (+) Total Outgoing Treasury

2in1+TD

Deposits (-) Incoming Outgoing

02/02/2009 (Mon) 1,654,673.30 1,616,603.30 1,200,311.16 416,292.14 0.00 38,070.00 454,440.84 453,687.69 753.15 37,316.85 0.00 0.00 0.00 37,316.85

03/02/2009 (Tue) 1,664,928.93 1,653,928.93 1,200,232.46 453,696.47 0.00 11,000.00 491,455.43 490,900.66 554.77 10,445.23 40,600.00 0.00 40,600.00 51,045.23

04/02/2009 (Wed) 1,697,513.28 1,644,413.28 1,173,473.50 470,939.78 0.00 53,100.00 523,098.02 521,815.04 1,282.98 51,817.02 16,100.00 0.00 16,100.00 67,917.02

05/02/2009 (Thu) 1,979,209.40 1,866,240.40 1,174,415.26 521,825.14 170,000.00 112,969.00 593,765.45 592,300.65 1,464.80 111,504.20 90,000.00 0.00 90,000.00 201,504.20

06/02/2009 (Fri) 2,168,426.07 1,977,876.07 1,385,443.95 592,432.12 0.00 190,550.00 794,258.04 790,476.94 3,781.10 186,768.90 43,500.00 0.00 43,500.00 230,268.90

07/02/2009 (Sat)

08/02/2009 (Sun)

09/02/2009 (Mon) 3,086,059.67 2,229,951.37 1,374,168.03 755,783.34 100,000.00 856,108.30 1,005,058.33 985,257.53 19,800.80 836,307.50 63,900.00 10,947.50 52,952.50 889,260.00

10/02/2009 (Tue) 3,880,626.02 2,967,026.02 2,081,001.34 886,024.68 0.00 913,600.00 1,775,240.97 1,772,780.87 2,460.10 911,139.90 150,250.00 0.00 150,250.00 1,061,389.90

11/02/2009 (Wed) 4,598,327.67 4,198,312.45 2,105,385.05 1,757,927.40 335,000.00 400,015.22 2,819,355.94 2,816,938.99 2,416.95 397,598.27 185,300.00 0.00 185,300.00 582,898.27

12/02/2009 (Thu) 4,754,281.76 4,357,760.65 1,778,971.73 2,578,788.92 0.00 396,521.11 3,162,821.35 3,159,510.67 3,310.68 393,210.43 81,525.15 0.00 81,525.15 474,735.58

13/02/2009 (Fri) 5,367,754.25 4,751,032.25 1,591,460.41 3,159,571.84 0.00 616,722.00 3,658,389.99 3,635,301.34 23,088.65 593,633.35 126,500.00 0.00 126,500.00 720,133.35

14/02/2009 (Sat)

15/02/2009 (Sun)

16/02/2009 (Mon) 6,846,057.91 5,795,248.87 1,709,364.26 3,585,884.61 500,000.00 1,050,809.04 4,345,933.07 4,305,019.91 40,913.16 1,009,895.88 308,540.00 310.35 308,229.65 1,318,125.53

17/02/2009 (Tue) 7,549,385.41 7,035,976.18 2,500,124.84 4,205,851.34 330,000.00 513,409.23 5,524,235.69 5,513,210.14 11,025.55 502,383.68 308,700.00 762.10 307,937.90 810,321.58

18/02/2009 (Wed) 7,829,969.33 7,610,149.68 2,025,149.72 5,284,999.96 300,000.00 219,819.65 6,097,488.24 6,091,301.54 6,186.70 213,632.95 293,098.50 0.00 293,098.50 506,731.45

19/02/2009 (Thu) 8,719,814.28 8,025,022.68 1,732,481.09 5,942,541.59 350,000.00 694,791.60 6,526,861.91 6,446,761.91 80,100.00 614,691.60 406,527.50 0.00 406,527.50 1,021,219.10

20/02/2009 (Fri) 9,539,704.73 8,614,991.76 2,187,955.42 6,427,036.34 0.00 924,712.97 7,465,039.71 7,414,862.26 50,177.45 874,535.52 479,129.00 1,004.40 478,124.60 1,352,660.12

21/02/2009 (Sat)

22/02/2009 (Sun)

23/02/2009 (Mon) 11,378,831.75 9,908,738.80 2,071,585.27 7,167,153.53 670,000.00 1,470,092.95 8,569,574.30 8,561,503.55 8,070.75 1,462,022.20 155,703.60 6,465.65 149,237.95 1,611,260.15

24/02/2009 (Tue) 12,065,342.85 11,106,888.00 2,805,196.48 8,201,691.52 100,000.00 958,454.85 9,806,174.38 9,802,698.59 3,475.79 954,979.06 95,223.45 0.00 95,223.45 1,050,202.51

25/02/2009 (Wed) 12,690,587.50 11,992,784.33 2,255,275.52 9,157,508.81 580,000.00 697,803.17 10,211,926.70 10,196,271.65 15,655.05 682,148.12 587,347.65 0.00 587,347.65 1,269,495.77

26/02/2009 (Thu) 13,926,646.74 12,893,668.54 2,475,478.90 9,968,189.64 450,000.00 1,032,978.20 11,254,785.75 11,228,404.94 26,380.81 1,006,597.39 467,025.00 1,657.00 465,368.00 1,471,965.39

27/02/2009 (Fri) 14,613,737.81 13,846,795.15 2,665,984.15 10,940,811.00 240,000.00 766,942.66 12,558,761.30 12,401,906.15 156,855.15 610,087.51 234,390.00 15,561.15 218,828.85 828,916.36

28/02/2009 (Sat)

10 July 2015

FIGURE 1 Positive net deposit payment distribution with probability: in growing phase

FIGURE 2 the impact of a positive net deposit on ALM with probability distribution: in growing phase

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1

0 0.0000001 0.0000002 0.0000003 0.0000004 0.0000005 0.0000006 0.0000007 0.0000008 0.0000009

Cum

ula

tive P

robability

Pro

bability D

ensity

Net Deposit Payment(cash inflow-cash outflow)

Intraday Net Deposit Payment Distribution

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1

0

5

10

15

20

25

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Cum

ula

tive P

robability

Pro

bability D

ensity

Net Payment /Toal Monthly Liability

Intraday Net Deposit Payment

11 July 2015

Over time, the net deposit payment distribution is assumed to be strongly peaked at the high

percent net deposit withdrawal level. The bank expects high percent of its net deposit funds to

be withdrawn on any given day with the highest probability.

The effect of net deposit drains on the Balance Sheet (Liquidity risk and ALM)

For the case if the bank has a mean or expected net deposit drain, so its new deposit funds and

other cash flows are expected to be insufficient to offset deposit withdrawals. The liability

side of its balance sheet is contracting. TABLE 3 illustrates a case of 5 percent net drain of

deposit accounts of total liability (or in term of CHF, a drain of CHF 5 millions)

TABLE 3 The Effect of Net Deposit Drains on the B/S (in millions of CHF) Before the Drain

Assets Liabilities

Total cash assets (2in1) 70 Total deposits (2in1 +TD)

Total loans (TD) 10 Total borrowings (loans)

Other assets 20 Other liabilities

Total assets 100 100 Total liabilities

After the Drain

Assets Liabilities

Total cash assets(2in1) 65 Total deposits (2in1 +TD)

Total loans (TD) 10 Total borrowings (loans)

Other assets 20 Other liabilities

Total assets 100 95 Total liabilities

Clarify the roles, tasks, tools, processes and responsibilities of entities involved in liquidity risk management process and measures used to control liquidity risk at AXA Bank Switzerland

Even though liquidity needs is highly provided by the parent, AXA Bank Europe,

Brussels, and management fully understand all aspects of liquidity risk, the branch's

intraday liquidity risk management process should be effective in identifying, measuring,

monitoring, and controlling liquidity. The intraday liquidity risk management is to be

implemented in commensurate with the nature of the branch's operations and the branch

should also envisage a great role for intraday liquidity risk management.

Roles and responsibilities for liquidity risk management process

12 July 2015

Potential exposure to loss of earnings or capital due to high liability costs or unplanned

asset reduction may be substantial

The key responsibilities are: working capital, cash management, short- and long-term

liquidity, corporate finance and foreign exchange (FX) risk.

Head office Treasury & ALM Management

-Define centre treasury process and cash management methodology by product

-Define daily fund transfer by product

-Support liquidity plan and funding

Switzerland-Branch Treasury

-Set the level of value date for payments settlement and payment limits

-Monitor payment from existing deposit accounts vs. limit

-Follow up with back office on any limit excess

-Monitor intraday liquidity need

There is always dialogue between head office treasury and branch treasury to

discuss details of required reserve and treasury process as well as to ensure head

office treasury provide branch treasury with useful numbers

Head office treasury & ALM management group contacts

Treasury & ALM management Belgium

This procedure sets out the approach to what intraday liquidity risk management

on 2in1 accounts should be performed, and how it should be carried out.

Local treasurer calculate the expected net deposit payment from the available

source system or other reliable sources before 12:00 pm as business process

procedures defined for intraday liquidity management of SNB and Post Finance.

Where a liquidity risk is identified, it will be communicated to local CFO. Where

liquidity drain is communicated to local CFO, the local CFO must determine if the

pending payments will be permitted to settle. If the additional liquidity fund is

accepted, the local CFO should work with the responsible units to unwind the

position, obtain collateral, or purchase liquidity.

Local treasurer, in conjunction with the CFO, will be responsible for enforcing the

liquidity need procedures. Local treasurer will review all additional liquidity funds

that are marked as "Closed by CFO" on a daily basis to ensure that the action taken

is satisfied.

On a quarterly basis local treasurer provides head office treasury with the

information about borrowed additional liquidity fund.

Management information systems focus on significant issues and produce timely,

accurate, complete, and meaningful information to enable effective management of

liquidity

13 July 2015

Definition &

implementation of

liquidity framework:

risk definition, limits,

control, and reporting

Local Treasury

/CFO

Local CFO and

/or HO Treasury

Local Treasury User

Constitution and validation of risk evaluation

methods and model

HO ALM

Measurement &

analysis of Liquidity

position

Information of ALM

Local CFO presents the liquidity position and HO

ALM explains the recommendations and decision

Analysis of Liquidity

position and

preparation of

recommendations

HO Treasury & ALM

HO Treasury & ALM presents the liquidity position & recommendation and take decisions in order to

optimize the liquidity position

Application of HO

Treasury & ALM

decisions

-Max. fund transfer

-Dealing room for

borrowing liquidity

HO RM

Creation of a new

liquidity borrowing

Any change in

liquidity position

Follow up of

decisions

application