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Goal Programming Model Approach for Risk Mana~ement on Banking Based on Asset Liability Management (ALM) Norio Hibiki Tadaaki Fukukawa .n:eio Univer8ity The recent financial deregulation and internationalization have caused a great. deal of financial risk to banking in Japan. Therefore financial risk management becomes very important, and banks need to manage not only profit, but also risk. Several models relating to the bank management have been st.udied as mathematical programming problems in finance literatures. Risk measures are variously defined, however there are no models based on the idea of risk management (ALM). Therefore we propose the risk measures based on ALM, and the mat.hematical programming model approach with them. Then goal programming, which is one of the mathematical programming, is applied to the model, in order to manage profit and risk by set.ting their aspiration levels and required levels, and to represent the trade-off relation between profit. and risk. In this model, t.he management. is assumed t.o have t.hree kinds of conflict.ing goals, which are t.he goals of (i) interest rate risk exposure, (ii) profit, and (iii) maturity gap for active risk management (which means taking actively the risk based on expecting the trend of t.he interest rate). In addition t.o these specific goals, regulations, policy on banking .lnd market conditions have to be considered. The four kinds of const.raints are formulated, which are the const.raints of (i) the upper limit of liquidity risk exposure, (ii) the lower limit of risk asset ratio, (iii) the low"r limit of the ratio of cash t.o d"posit., and (iv) the upper and/or t.he lower bounds of feasible funding, inVEstment, and so on. Finally, several numerical examples are analyzed in order to investigate the performance of the approach. Due to space restriction, we describe two examples, which are (i) solved in various kinds of goal levels, and (ii) solved in different expectation to the trend of interest rate, in this paper. The results presented are so remarkably good that the model provides a very real advance over previously reported models. © 1992 The Operations Research Society of Japan

Goal Programming Model Approach for Risk Management on Banking Based on Asset Liability Management (ALM)