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Strategic Asset-Liability Management for Financial Institutions

London Financial Studies
Training overview
Professional Course
3 days
From 5,625 USD
Start dates
Online
5,625 USD
10/4/2021

Online
5,625 USD
11/22/2021

New York City
5,625 USD
Contact LFS for details
London Financial Studies

Course description

Strategic Asset-Liability Management for Financial Institutions

Strategic Asset-Liability Management (ALM) can significantly improve financial performance by delivering a better balance between returns and risks across a more comprehensive set of both on- and off-balance sheet assets and liabilities.

This advanced program covers best practice in ALM as well as ALM’s role as a strategic function in financial institutions.

Beyond full coverage of the key ALM areas of interest rate, liquidity, FX and credit risks, their measurement, and best practice management; the course also integrates all key risks into a state-of-the-art constrained optimization solution for ALM, compliant with the – now clearer – suite of regulatory requirements banks face going into "Basel IV".

Practical application and strategic decision making are emphasized throughout the program via real-world case studies and workshops, which focus on international best practices and explore the experiences of a range of institutions.

Who should attend?

This Strategic Asset-Liability Management for Financial Institutions is designed for:

  • Members of the Asset Liability Committee (ALCO)
  • Treasury professionals
  • Money market and FX traders
  • Management of credit, deposit, and other major business units
  • Liquidity investment managers and traders
  • Capital markets teams covering financial institutions
  • Strategic planning professionals
  • Risk managers and risk controllers
  • Financial officers and auditors (internal and external)
  • Regulators overseeing banking, investment, and trading books
  • IT professionals specializing in treasury systems

Training content

Day One

Risk Measurement and Management in ALM

Overview of ALM

  • ALM’s expanding role in managing risks and returns across the bank
  • ALM organization overview
  • Key risks managed – interest rate, liquidity, FX, and credit risks
  • Strategic ALM – Use of funds transfer pricing, full transfer pricing, and economic value added (EVA) to steer the balance sheet
  • ALM as a constrained optimization problem – maximizing profit subject to compliance with all regulatory and internal constraints holistically

Interest Rate Risk

  • Earnings and economic value of equity (EVE) impacts of interest rate risk (IRR)
  • Earnings-based IRR measurement models – repricing gap, maturity-adjusted repricing gap, marginal and cumulative gaps, standardized gap
  • EVE IRR measurement models – duration gap, cash flow mapping, duration intervals, modified residual life, clumping
  • IRR measurement in the trading book – VAR and expected shortfall; FRTB treatment
  • Behavioral and financial options – non-maturity deposits, pre-payments, term deposits, automatic interest rate options

Case Study 1: Deposit modeling at Barclays Plc

Case Study 2: Modeling pre-payments at Barclays Plc

  • Basis risk
  • Yield curve twist and curvature risk
  • Dynamic analysis of net interest income risk
  • Managing net interest income risk across currencies
  • Estimating asset and liability volatilities and correlations
  • IRR stress-testing and earnings-at-risk
  • IRR hedging techniques using interest rate swaps, swaptions, caps/floors/collars, futures, swap futures, forward rate agreements

Case Study 3: Use of interest rate derivatives to hedge interest rate risk on residential mortgage book

  • New BCBS standards for Interest Rate Risk in the Banking Book (IRRBB)
  • Estimating deposit interest rate elasticities

Workshop 1: Dynamic analysis of net interest income risk for a bank balance sheet and design of hedging strategy

Liquidity Risk

  • Key sources of liquidity risk – maturity mismatch, collateral posting requirements, and off-balance sheet
  • LCR and NSFR
  • Liquidity stress-testing
  • Key behavioral options – deposits (demand and time); pre-payable/revolving loans; liquidity/credit facilities
  • Deposit modeling under stress – deterministic, historic, and stochastic factor models

Case Study 4:  Deposit modeling under stress at Barclays Plc

  • Stressing liquidity/credit facility drawdowns – deterministic, historic, and stochastic factor models

Case Study 5:  Modeling stressed liquidity/credit facility drawdowns at Deutsche Bank AG

  • Collateral management – CSAs, initial margin requirements, central clearing
  • Funding Value Adjustment (FVA) and Margin Value Adjustment (MVA)

Case Study 6: Calculating FVA and MVA

  • Stressed derivative collateral posting requirements – modeling for ratings triggers and stressed financial market conditions

Case Study 7: Stress testing collateral posting requirements for a derivatives portfolio

  • Contingency funding plan

Credit Risk

  • Key sources of credit risks – loans, bonds, and counterparty credit risk
  • Expected and unexpected credit losses, including expected credit loss measurement and dynamics under IFRS 9
  • Credit value at risk
  • Using credit derivatives to manage loan book credit risk

Case Study 8: Use of CDS at Nordea to manage loan book credit risk and benefit from capital efficiency

  • Use of securitization for credit risk transfer, funding and/or capital efficiencies

Case Study 9: Use of securitization at Lloyds Banking Group Plc

  • Options for NPL management – outsourced collections; sale; creation of non-core units; securitization; EVA approach as best practice

Case Study 10: What strategies are European banks using to deal with their NPLs?

  • Counterparty credit risk – Credit value adjustment (CVA); CVA hedging; use of proxies for counterparty credit curves; new standardized approach for CVA (SA-CVA) and how best to arrange derivatives activities for CVA capital efficiency

Day Two

Strategic ALM

ALM Optimization

  • Recap of key regulatory requirements within which ALM must be conducted – Basel 3 Pillar 1 capital requirements; LCR and NSFR; leverage ratio; Pillar 2 capital and liquidity requirements; total loss absorbency capacity (TLAC) and minimum requirement for eligible liabilities requirement (MREL); various “Basel 4” components including revised standardized approach for credit risk, SMA (operational risk), SA-CVA, new market risk standard (FRTB), IRRBB and capital output floor
  • How should banks think of ALM as a constrained optimization problem to maximize earnings subject to these various regulatory requirements as well as internal risk limits

Case Study 11:  Model for ALM optimization for a hypothetical bank, compliant with all regulatory requirements and making recommendations for strategy for the constituent business units

Workshop 2: Simulating the ALM-optimized balance sheet for new business development and market risk shocks. What actions should be taken?

Collateral Management

  • Understanding Credit Support Annexes (CSAs)
  • New regulatory requirements for initial margin
  • Central clearing
  • Collateral management – rehypothecation vs. segregation; “cheapest to deliver” collateral optionality; managing the liquidity buffer composition in different stress scenarios
  • Funding Value Adjustment (FVA) as a measure of the net cost of variation margin collateral posting

Case Study 12: Calculating FVA

  • Margin Value Adjustment (MVA) as a measure of the cost of initial margin collateral posting

Case Study 13: Calculating MVA

  • Stressed derivative collateral posting requirements – modeling for ratings triggers and stressed financial market conditions
  • How should we manage the liquidity buffer?

Risks and Returns in Fair Value Portfolios

  • Strategic use of trading book and investment/available for sale portfolios
  • VAR, stressed VAR, and expected shortfall frameworks for monitoring risk

Case Study 14: Fundamental Review of the Trading Book (FRTB). What does the ALCO need to be aware of?

  • Measuring returns on risks taken in fair value portfolios
  • Risk limit setting
  • ALM oversight of market risks to control capital and funding impacts

Funds Transfer Pricing. Full Transfer Pricing and Economic Value Added

  • Accurate business unit performance measurement as key to capital allocation
  • Transfer pricing broadly as the way to achieve accurate performance measurement and to steer the balance sheet
  • The need for liquidity risk pricing and funds transfer pricing (FTP) as the mechanism to do this
  • Options for calculating the FTP curve
  • Effective maturity measurement for FTP on assets and liabilities with significant behavioral elements
  • Pricing contingent liquidity risk – deposits, liquidity/credit facilities, derivatives collateral posting

Case Study 15: Implementing FTP at a predominantly retail bank

  • FTP for investment banking operations – behavioral holding periods and high contingent liquidity risks

Case Study 16: Implementing FTP at a universal bank with significant investment banking operations

  • Full transfer pricing and economic value added (EVA)

Case Study 17: What does a complete EVA framework look like?

  • Should Treasury make a profit from transfer pricing?

Day Three

Strategic ALM (Cont.)

ALM and Capital Management

  • Role of ALM in capital management
  • Regulatory vs. economic capital
  • Budgeting by business unit and firm-wide
  • Forming the capital plan in conjunction with the business plan and stress testing it for ICAAP or other purposes. What target capital range should we have?
  • Setting risk appetite and limits across the group
  • Optimizing capital issuance – capital composition choices (equity, Additional Tier 1, Tier 2, and other loss absorbency capacity) and implications for earnings and balance sheet resilience

Case Study 18: Capital planning at Barclays Plc

  • Target ratings considerations
  • Performance measurement and capital allocation across business units – EVA; returns on risk-adjusted capital; diversification; and strategic considerations

Case Study 19: EVA and capital allocation at Nordea

  • Deleveraging transactions
  • Measuring ALM performance
  • Role of ALM in capital efficiency

Derivatives Hedging in ALM

  • Derivatives hedge accounting under IFRS 9. What place for non-designated hedges with economic benefit?
  • Review of key interest rate and FX derivatives used in ALM
  • Level 2 vs. Level 3 valuation
  • Using interest rate derivatives to manage net interest income, fair value portfolios, and funding management
  • Standard vs. non-standard derivatives
  • Operational and liquidity implications
  • Enhancing income through use of derivatives
  • ALM impact of clearing derivatives through central clearers vs. bilateral margining
  • Collateral and capital implications of new derivatives regulations
  • Impacts on capital and financial performance from derivatives applications

Case Study 20: Use of cross currency interest rate swaps to hedge non-base currency own debt issuance

ALM and Funding

  • Review of funding instruments, their behavior, costs, risks, and benefits – deposits (retail, SME, large corporates); interbank; commercial paper and certificates of deposits; secured financing transactions; covered bonds; securitization; senior unsecured debt
  • Optimizing the funding mix for the business model

Case Study 21: Reconfiguring the funding mix at Paragon Banking Group Plc

  • Where is the line between capital and funding?
  • Target ratings and financial flexibility considerations
  • Developing and maintaining market access
  • Managing funding maturity profile
  • Use of derivatives in financing strategies
  • Securitization – which assets; what risk retention; tranching; capital requirements; cash flow considerations
  • Structured financing products and strategies
  • Off-balance sheet and special purpose vehicle financing

Insurance Company ALM

  • Solvency 2 efficient investment portfolio construction under the standard formula and internal model options
  • Managing interest rate risk, taking account of guarantees (at maturity, annual, and clique), volatility adjustment, risk margin, and transitional measures on technical provisions – the problem of the ultimate forward rate
  • Reinsurance program design under Solvency 2
  • Balancing returns and risks in product design and mix under Solvency 2 – how to measure economic value of new business (VNB)

Case Study 22: VNB measurement at Allianz SE

  • Derivatives in insurance ALM
  • Setting the Solvency 2 ratio target range, ladder of intervention, and composition of own funds

Case Study 23: Implementing Solvency 2 efficient ALM across product design, investment portfolio construction, interest rate risk management, and reinsurance

About London Financial Studies

London Financial Studies

Global markets move quickly, evolving continuously and deepening in complexity. Over the past decades London Financial Studies has provided specialist executive education programs and short courses focused exclusively on global capital markets. Preparing only the highest quality and most relevant...


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