Bank Asset-Liability Management in a Low-Interest and New Regulations Environment

3 days
Prague, NH Hotel Prague
  • New Challenges in ALM: Low Rates and Tighter Regulation
  • Interest Rate and Spread Analysis
  • Balance Sheet Optimization under Regulatory Constraints
  • GAP and Duration GAP Analysis
  • Analyzing Non-Maturing Assets and Liabilities
  • Value-at-Risk and Regulatory Capital Assessment
  • Managing Interest Rate Risk with Derivatives
  • Managing and Pricing Liquidity Risk
A comprehensive, three day course on managing risk and profitability under the challenging, post-crisis conditions of ultra-low rates and tightened liquidity and capital standards

The purpose of this seminar is to give you a good understanding of Asset-Liability Management as a tool for managing an institution's balance sheet in pursuit of the optimal balance between revenues and risks.

We start with an introduction to ALM, and we give an overview of the objectives and means of ALM. We also discuss the challenges of managing a bank's profitability and risks in the current environment of extremely low interest rates and heightened capital and liquidity standards.

Next, we explain important concepts such as margin, spread, leverage, surplus, and balance sheet risk. We look at the balance sheets of "typical" institutions and discuss the funding/investment requirements and constraints that arise from the business nature of these institutions.

We then look into how interest rate risk can be measured and managed within the ALM framework. We explain and discuss measures such as Net Interest Income (NII), GAP, and Duration GAP. We also present and explain models for measuring interest rate risk on non-maturing assets and liabilities (e.g. Demand deposits) and for measuring "Value-at-Risk" of trading assets and liabilities.

Further, we explain interest rate risk can be managed with the objective of maximizing net interest income and ROE. We explain how interest rate risk can be managed using derivative instruments such as FRAs, swaps and interest rate options. We explain how "macro swaps" are used by banks to hedge interest rate risk at the balance sheet level, and we show how caps, floors and swaptions can be used to manage the explicit and embedded option risks of a bank's assets and liabilities. We also discuss the challenges that follow from the new EMIR and other regulatory requirements.

We present and explain tools for assessing liquidity risks, including liquidity ratios, cash flow projections and the "liquidity curve", and we explain how liquidity risk can be managed in an ALM context.

Finally, we look at liquidity costs and liquidity pricing factors, and we explain the process of "liquidity transfer pricing".

09.15 - 12.00 Introduction to ALM

  • ALM - a Strategic Management Tool
  • The Challenges of a Low-Interest Rate Environment
  • The Impacts of Basel III, EMIR and other Regulations
  • Organizing ALM: The ALCO and the ALCO process

Interest Rate and Spread Analysis

  • Profitability and Interest Rate Risk
    • Margins, leverage and ROE
    • The effects of low interest rates, high capital levels and competition on margins
    • Maturity transformation risk
    • Spread risk
  • Interest Rate Risk in the Banking Book
    • Basel Pillar II requirements
    • NPV Risk vs. “Re-pricing” Risk
  • GAP Analysis
    • Static vs. dynamic GAP
    • Case: GAP analysis in “NoHope Bank “
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Interest Rate and Spread Analysis (continued)

  • Simulation Method
    • Simulating NII
    • Simulating effect of product mix and pricing
    • Monte Carlo simulation
  • Duration Analysis
    • The economic value of assets and liabilities
    • Duration GAP and duration of equity
    • Case study: Duration analysis in “NoHope Bank”
  • Measuring Interest Rate Risk of Non-Maturing Assets and Liabilities (NoMALs)
    • Factors that affect deposit volume
    • The annuity-margin approach
    • Stochastic programming model
    • Calculating duration and convexity of NoMals
    • Constructing replicating portfolios
    • Case study: NoMALs in “NoHope Bank”
  • Analyzing Prepayment Risk
  • Exercises

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Measuring Interest Rate Risk in the Trading Book

  • Basel Pillar I Requirements
  • General vs. Specific Interest Rate Risk
  • The Maturity and Duration Approaches
  • Value-at-Risk Analysis
    • Value-at-Risk for bonds and other instruments
    • Value-at-Risk for interest rate derivatives
  • Yield Curve Analysis
    • Key rate duration
    • Principal components analysis
  • Case: Value-at-Risk in “NoHope Bank”
  • Exercises

Balance Sheet Optimization

  • The Steps towards Increased ROE
  • A/L mix and pricing
  • Balance sheet re-engineering

12.00 - 13.00 Lunch

13.00 - 16.30 Balance Sheet Optimization (Continued)

  • Using Derivatives for Interest Rate Risk Management
    • Using FRAs and futures to manage re-pricing risk
    • Using interest rate swaps to hedge cash flow risk
    • Using interest rate swaps to hedge fair value risk
    • Using “macro swaps” to hedge at the bank level
    • Using interest rate options to cap funding costs
    • Using interest rate options to hedge explicit and embedded optionality of assets and liabilities
    • Managing pre-payment risk
  • Accounting Issues
    • Accounting treatment of derivatives under IFRS/US GAAP
    • Hedge accounting: cash flow vs. fair value hedges
    • Treatment of macro hedges
  • Case Study: Using Derivatives to Optimize Balance Sheet in “NoHope Bank”
  • Exercises

Day Three

09.00 - 09.15 Recap

09.15 - 12.00 Liquidity Management

  • An ALM Framework for Assessing Liquidity Risk
  • Factors that Affect Bank Liquidity
    • Financial market access
    • Balance sheet structure and earnings
  • Balance Sheet Analysis
    • Core vs. non-core deposits
    • Available-for-sale vs. held-to-maturity securities
  • Sources of Cash Flow Uncertainty
  • Assessing Liquidity Risk Using Balance Sheet Ratios
  • Assessing Liquidity Risk Using Stochastic Cash Flow Mismatch Analysis
  • Basel III Regulatory ratios
    • Liquidity coverage ratio
    • Net stable funding ratio
  • Managing Liquidity Risk
    • Managing market access
    • Contingency planning
    • Foreign currency liquidity management   
  • Practical Case Studies and Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Liquidity Pricing and Fund Transfer Pricing

  • A Graphical Representation of the FTP Process
  • Approaches to FTP
    • Zero cost of funds approach
    • Pooled “average” cost of funds approach
    • Matched-maturity marginal cost of funds approach
  • Four Important Questions About Marginal Costs
    • Where do we find the bank’s marginal costs?
    • What should be included?
    • What does marginal cost not tell us?
    • Credit spreads – whose marginal costs?
  • Quantifying the Costs of Loan Commitments and Non-Sticky Liabilities
  • Managing Contingent Liquidity Risk
  • Recouping the Cost of Carrying an LCR Liquidity Cushion via LTP
  • Example of Pricing Contingent Liquidity Risk
  • Practical Case Studies and Exercises

Evaluation and Termination of the Seminar

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