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Strategic ALM, Treasury and Capital

Day One

ALM Introduction and Overview

  • The evolving role of ALM in various financial institutions
  • Strategic ALM and economic capital
  • Expanding portfolio of assets and liabilities within the ALM perspective
  • Using ALM to manage returns on risks
  • Important links for liquidity management and transfer pricing through ALM

Group Discussion: How should we implement ALM in our institution to optimise the execution of our business strategy?

  • What committees/groups (e.g., ALCO and possibly other groups) need be formed?
  • Where do these committees report in the overall organisation?
  • Who should attend the meetings?
  • Who should be the titular head of the committee?  Who should act as secretary/facilitator?
  • How frequent should meetings be held and what is an optimal time length?
  • What assets and liabilities should be reviewed?
  • What type of reports should be presented?
  • What decisions should be made by the committee?
  • ALM functions related to Treasury, Finance, and Risk Management
  • Regulations and ALM perspectives
  • Relationship of regulatory capital and economic capital
  • The role of ALM in reward-risk budgeting
  • Development of ALM in the future

ALM Frameworks for the Banking Book

  • Creation and categorization of assets and liabilities in the banking book
  • Measuring interest rate, liquidity and currency gaps
  • Identifying interest-rate sensitive assets and liabilities that impact performance
  • Traditional gap analysis of standard asset and liability products
  • Basis, yield curve twist, and re-investment/re-funding risks
  • Measuring Net Interest Income (NII)  risks with static and dynamic sensitivity analysis
  • Multi-currency NII ALM techniques and strategies
  • Complications from financial, contractual, and real options in assets and liabilities
  • Estimating impacts of volatility and correlations in assets and liabilities
  • Stress testing NII management approaches
  • NII impacts on liquidity and capital management
  • Earnings-at-risk metrics for NII
  • Impacts on capital from income changes and financial performance

Case Study:  How should we manage the interest rate and currency risks in our banking book relative to our strategy and market views?

  • Choices for measuring interest rate and currency risks?
  • How should we set limits on risk taking?
  • Should we be able to increase risks to profit from expected market conditions?
  • Who should be charged with taking these risks?
  • How can risks be reduced or increased through cooperation of various business units?  Should we use cash positions or derivatives?

Day Two

Balance Sheet Development

  • Stock flow balance sheet analyses
  • Balance sheet maturity transformation and liquidity risks
  • How the banking industry evolved into the situation we find today
  • Primary and derived deposits and bank loans
  • Complications in money supply, the banking world, and the economy
  • Simultaneity of asset and liability creation and destruction
  • Linkage/de-linkage of central bank reserves and money
  • Management of reserves, reserve requirements,  and central bank policies
  • Understanding the impacts of quantitative easing on banks and the economy
  • Narrow and “real bills” banking compared to broad investment/universal banking
  • Banking positions evolving to securities and off-balance sheet items
  • Collateral management within ALM

Case Study:  Strategic operation of our bank’s lending and deposit businesses

  • Customers’ loans create deposits?
  • Where do primary deposit monies come from?
  • How much liquidity do we need for these businesses?
  • How do we manage reserves? Manage capital?
  • The role of central bank and interbank market for our activities?
  • What can we do with excess reserves?

Market Value Returns and Risks for Investment and Trading Portfolios

  • Strategic use of trading, available for sale and investment portfolios
  • Managing collateral against these positions
  • Portfolio management techniques for strategic ALM
  • Price risks in bonds and other asset-liability portfolios
  • Classical Value-at-Risk (VaR), Expected Shortfall,  and other analytical frameworks for market value portfolios
  • Behavioural sensitivities on valuations and returns
  • Value impacts of off-balance sheet commitments and contingencies

Case Study:  Managing Market Value Risks and Returns

  • Simulating risks and returns on portfolios
  • Comparing risk metrics alternatives
  • Hedge strategies for market risks
  • Special problems for commercial and retail mortgage securities, credit card portfolios, and other ABS products
  • Developing limits packages for business units
  • Establishing ALM policies and controls for market value portfolios
  • Impacts on capital from market value changes and financial performance
  • Viewing the banking book assets and liabilities as a variant of market value assets and liabilities
  • Transfer pricing for market value portfolios

Critical Applications for Interest Rate and FX Derivatives in ALM

  • Review of interest rate and foreign exchange derivatives used in ALM
  • Mark-to-market and mark-to-model techniques
  • Applications of interest rate derivatives in NII, market value portfolios, and liquidity/funding management
  • Hedging strategies and effectiveness

Group Discussion:  Suitability and appropriateness of standard and non-standard derivatives structures used by ALM

  • Qualifying hedges versus non-qualifying use of derivatives?
  • Should derivatives be used to enhance the income profile?
  • What are advantages and disadvantages of these types of strategies?
  • Are structured derivatives that provide income benefits suitable?
  • Accounting, liquidity and counterparty concerns from uses of derivatives in ALM
  • ALM impact of derivatives moving to Central Counterparties (CCPs) versus bilateral trades remaining on balance sheet
  • Collateral and capital implications of the changes in derivatives regulations
  • Derivatives hedges counterparty valuation adjustments (CVA)
  • Own-debt fair Value Adjustments (DVA) and Funding Value Adjustments (FVA)
  • Impacts on capital and financial performance from derivatives applications

Strategic ALM Involvement with Credit and Counterparty Exposures

  • Credit exposures in commercial / retail loans, credit risky bonds and counterparty trades
  • Credit metrics for expected and unexpected losses
  • Developing credit value-at-risk for return-risk budgeting
  • Interpreting and using credit spreads
  • Benefits and challenges of active credit portfolio risk management
  • Using credit derivatives to manage and / or securitize credit risk
  • Applications of Credit Default Swaps (CDS), credit linked notes, and other credit derivatives products in ALM

Group Exercise:  Assessing Credit Total Returns for strategic ALM

  • Appropriate frameworks for valuing credit risk
  • Incorporating credit spread risks into limits and capital
  • Attribution of credit versus market returns to decision makers
  • Credit risk management through securitization and strategic structured finance
  • Transfer pricing adjustments using own-credit spreads and country credit spreads
  • Impacts on capital from involvement in credit concerns by ALM and financial performance
  • Establishing ALM policies and controls for credit portfolio risks

Day Three

Strategic ALM Involvement with Credit and Counterparty Exposures (continued from Day 2)


Financing Strategies Managed by ALM

  • Defining the mix of financing alternatives
  • The relationship of liquidity, financing, and capital
  • The role of retail and commercial deposits in ALM

Group Discussion:  Transfer Pricing Liquidity

  • What are the appropriate frameworks for transfer pricing?
  • How should we build out transfer pricing rates for various business units?
  • Should transfer pricing have a profit element?
  • Incorporating lines of credit and contingent liquidity into transfer pricing?
  • Who should decide transfer pricing rates? How frequently?
  • Special issues for transfer pricing to deposit and funding businesses?
  • Estimating deposit run-off, elasticity and liquidity impacts
  • Developing and maintaining financial market access
  • Framework for measuring and optimizing financing choices
  • Managing liquidity and financing maturity profile
  • Maintaining desired rating and financial flexibility
  • Risks and rewards inherent in various financing choices
  • Use of derivatives in financing strategies
  • Securitization and credit enhancement strategic financing strategies
  • Opportunities for structured financing products and strategies
  • Off-balance sheet and special purpose vehicle financing
  • Impact of regulatory capital requirements on financing strategies
  • Regulatory requirements for liquidity maintenance

ALM and Capital: Regulatory and Economic

  • Relationship of regulatory capital and economic capital
  • The impacts of Basel III on the practice of ALM
  • Linkage of regulatory capital to ALM portfolios
  • Credit, market, and operational risk capital
  • Review of existing and new capital standards, supervisory review, and market transparency requirements
  • Evolution of modelling requirements and the role of ALM
  • Update on Basel III decisions

Workshop Summary and Conclusions: ALM and Financial Performance

  • Balancing financial performance targets within risk management policies and controls
  • Developing acceptable business and entity-wide ALM profiles
  • Business unit and entity-wide return-risk budgeting
  • Measuring ALM financial performance
  • Returns on economic and risk-adjusted capital
  • Efficient employment and allocation of capital
  • The role of ALM in the deployment, management and conservation of capital
  • Development of resources for ALM and preparing for the future

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