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 Asset amp Liability Management in Banks T1657 QR Code
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Asset & Liability Management in Banks



Post the global financial crisis, the role of the Treasury within a bank is more challenging than ever. The regulation that followed the crisis, in particular Basel III, has meant that optimizing assets and liabilities is vital in mitigating the ‘hit’ on Return on Equity that the regulation represents.

This workshop looks to explain the fundamental role of the ALM function and, via real-life case studies and excel based simulations, explain how the function looks to optimize balance sheet performance via the more selective deployment of balance sheet resources. In addition, it will explore the fluid regulatory landscape in which ALM is functioning and outline what the industry considers as best practice in terms of dealing with the challenges that the landscape presents.

Hence by attending the day workshop, delegates will be better equipped to work in or with the ALM function and support the optimization of the balance sheet they are tasked to achieve.

Course Objectives:

At the end of this course the participants will be able to:

  • Describe the role of the ALM function within a bank
  • Articulate the causes and consequences of the global financial crisis, the motivation for the regulation that has come in the wake of it, and the impact it has had on the ALM function
  • Explain the impact of the regulation on a bank’s balance sheet in particular the resources of capital and liquidity
  • Understand the role of the ALM function in optimizing the balance sheet via either capital preservation or margin maximization achieved by a more selective approach to assets issued and funding raised
  • Appreciate what future challenges lie ahead for the ALM function in particular from the potential introduction of Basel IV
  • Identify ways in which the wider business can support the ALM function in dealing with these challenges via, for example, communication and alignment of business incentivization

Targeted Audience:

  • Group Treasurers
  • Chief Risk Officers
  • Accounting and Finance Managers
  • Asset Managers
  • Liquidity Managers
  • Risk Managers and Risk Controllers
  • Risk Officers
  • Auditors and Bank Regulators

Course Outlines:

Unit 1: 

The evolving role of Asset and Liability Management [ALM]:

  • Defining the role of ALM 
  • Recap of the Global Financial Crisis
  • What caused it?
  • What resolved it?
  • What were the lessons learned?
  • How has it impacted ALM functions?

Linking Asset and Liability Optimisation to Return on Equity:

  • Impact of Basel III on Capital

  • The risk constraint ratio
  • The leverage ratio
  • Recap on the Standardised Methodology for Credit Risk
  • Credit Conversion Factors
  • Adjusting for Collateral
  • Gearing - Linking asset and liability pricing to returns on capital
  • So what does this mean for ALM and ultimately strategy?

Optimizing Assets - Internal Rating Based (IRB) approach for Credit Risk:

  • Incentives for adopting IRB – more complexity less capital
  • Foundation IRB (FIRB) compared to Advanced IRB (AIRB)
  • Constructing the IRB equation for wholesale 
  • Constructing the IRB equation for retail
  • Adjusting IRB for calculation of Economic Capital

Traded Market Risk

  • Sources of Market Risk 
  • Evolution of Market Risk Regulation 
  • Measuring Market Risk using Regulatory VaR and Stressed VaR
  • Limitations of Basel II.5 an overview and Fundamental Review of the Trading Book [FRTB]

Unit 2: 

Asset and Liability Gap Analysis:

  • Challenges of Maturity Transformation
  • Selecting appropriate time buckets
  • Distribution of maturing and nonmaturing assets and liabilities
  • Introduction to behavioral modeling 
  • Adjusting for prepayment and redemption 

Non-Traded Market Risk - Overview of IRRBB

  • What is IRRBB and what are the sources of it
  • Comparing IRRBB to CSRBB
  • Measuring IRRBB
  • Economic Value of Equity [EVE} vs Earnings at Risk [EAR]
  • Review of BIS 368 ‘Final’ Standards for IRRBB
  • Treatment of cash flows
  • Time bucketing of cash flows
  • Discounting of cash flows
  • Stressing cash flows

Liquidity Risk

  • Typical Liquidity Metrics
  • Evolution of Liquidity Regulation
  • Basel III Liquidity Regime
  • Liquidity Coverage Ratio [LCR]
  • Net Stable Funding Ration [NSFR]
  • How they work in harmony 
  • So what does this mean for ALM and ultimately strategy and liquidity preferences?

Beyond Pillar I

  • Overview of the Individual Capital Adequacy Assessment Process [ICAAP]
  • Overview of the Individual Liquidity Adequacy Assessment Process [ILAAP]
  • What stress is appropriate – what qualifies as ‘severe but plausible’
  • Harmonising ICAAP and ILAAP
  • Effective Recovery and Resolution Planning [RRP]

Unit 3:

Evolution of FTP and its role in managing Non Wholesale Portfolios

  • Challenges in Non-Wholesale Portfolio Management
  • Defining FTP
  • What is it?
  • Why has it?
  • Why is it essential in optimizing portfolios
  • Evolution of FTP methodologies
  • Zero cost curve
  • Average cost curve
  • Maturity matched curve
  • The regulatory view

Deriving the FTP Curve

  • Market sources and proxies
  • Secondary Trading
  • CDS
  • Peer spreads
  • Challenges of deriving the curve in an underdeveloped wholesale environment
  • Use of basis and cross-currency swaps
  • Ownership and governance

Operating FTP

  • ‘Behaviouralising’ Portfolios
  • Methodologies
  • Ownership and governance
  • Including management reporting – stock/flow rate blending
  • Driving behaviors 
  • Aligning business incentivization
  • Tools/Products to optimize

Pricing with FTP

  • Pricing flow business
  • Pricing ‘cushions’/buffers
  • Reflecting regulation in FTP e.g. impact of LCR
  • Trends and trajectories in FTP methodologies – inclusion of capital in an FTP mechanism

Unit 4:

Tools for Managing FX and IR Risk

  • Recap on Cash FX instruments
  • Spot
  • Forwards
  • Swaps
  • Deriving Forwards rates and their applications
  • Using FX swaps to optimize funding
  • Interest Rate Swaps [IRS] defined
  • Types of IRS and their application
  • Fixed for Floating IRS [coupon swaps]
  • Floating for Floating IRS [basis swaps]
  • Pricing and valuation of IRS

Applications of Cross Currency Swaps [XCCY] in managing FX and IR risk

  • XCCY swaps defined
  • Application of XCCY swaps
  • Long term FX risk management
  • Synthetic funding efficiency
  • Pricing and valuation of XCCY swaps

Unit 5:

Structural Hedging

  • Best practice in Structural Hedging
  • What to hedge
  • When to hedge
  • How much to hedge
  • Governance and review– keeping the structural hedge appropriate
  • Distributing the cost of unwinding

Future Challenges for ALM and wrap up

  • Total Loss Absorbing Capacity [TLAC]/Minimum Requirement for Eligible Liabilities [MREL]
  • Overview of Basel IV – focus on consistency
  • What does this mean for ALM?

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