Asset & Liability Management

A 4-day course covering: Using EAR and EVE to measure IRR Measuring liquidity cash flow coverage and survival horizons Managing interest rate risk Managing liquidity risk Best practice risk reporting Contingency planning Meeting requirements for regulatory compliance The course is designed to combine theory and global best practice. The course will explore its issues and its challenges for both bankers and regulators. The course will emphasise practical advantages and disadvantages of risk measurement and management tools and techniques. Samples of best practices risk reports will be provided. Course knowledge will be reinforced through a workshop and a course review. Basic knowledge in risk management, control and statistics is required. Active participation of the class is necessary to benefit from the full value of this programme. The case studies will give you real life examples of the theories covered in the lectures, giving you a greater understanding of the course topics. The same sample bank is used for most risk measurement, reporting and hedging examples to enhance examples and comparisons. All delegates will receive comprehensive course documentation for use before and during the programme. This will enable you to return to your organisation with an extensive and valuable source of information for future reference. Who should attend? Group Treasurers Accounting and Finance Managers Asset Managers Liquidity Managers Risk Managers and Risk Controllers Risk Officers Auditors and Bank Regulators Teaching methodology The course is designed to provide a mix of concepts with practical applications Course material and organisation begin with fundamentals and proceed to advanced concepts Heavy emphasis on data and algorithm limits on quantitative modelling Case study exercises based on real-world examples
Day 1 Interest Rate Risk on The Banking Book ALM and Risk Overview Risk and volatility Financial institution risks Measuring Interest Rate Risk Components of Interest Rate Risk Critical tasks and risk elements Balance sheet products, positions and options Gap Analysis - Concepts and variations - Advantages and disadvantages Earnings at Risk (EaR) - Concepts and variations - Advantages and disadvantages Duration and Duration of Equity (DoE) - Concepts and variations - Using key rate duration - Understanding convexity - Advantages and disadvantages - Duration of Equity (DoE) Economic Value of Equity (EvE) - Concepts and variations - Advantages and disadvantages Value at Risk - Concepts and variations - Appropriateness for IRR measurement Interest Rate Risk Stress Testing Deterministic versus stochastic rate scenarios - Deterministic sources: estimates, forecasts or statistical analysis - Parallel and twist scenarios - Probable and improbable rate changes - Rate changes, yield curve smoothing and term structure models Deposit, Loan and Other Assumptions for IRR Modeling Indeterminate maturity deposits - Decay analysis - Replicating portfolio analysis - Econometric/reduced form models - Other techniques Pre-payable loans - Understanding path dependent options - Adjusting option exercise for transaction costs - Multi-factor models Other rate sensitive cash flows Measuring Interest Rate Risk Summary Duration and EvE comparison Gap, Duration, EaR and EvE comparisons Model methodology grade card EaR, EvE, the direction and timing of IRR exposures Best practice measurement recommendations IRR Group Exercises Calculating Gap Calculating Earnings at Risk Calculating Duration of Equity Calculating Economic Value of Equity Each attendee must have a laptop or equivalent compute with software such as MS Excel ®that does present value calculations. Day 2 Liquidity Risk on the Banking Book Measuring and Monitoring Liquidity Risk Liquidity risk overview and critical tasks Components and characteristics Liquidity ratios and traditional metrics Cash flow forecasts Best practice liquidity risk measurement Liquidity Scenarios and Stress Levels Scenario and stress test: purposes and requirements Stochastic Stress Tests: Liquidity VaR Deterministic scenarios - Idiosyncratic scenarios - Systemic scenarios - Combination scenarios and contagion - How many scenarios? - Describing scenarios Defining and using severity or stress levels - Degrees of severity - Worst case stress vs. plausible stress - How many stress levels? Reverse stress tests Incorporating capital linkages in liquidity stress tests Scenario and stress test summary Liquidity Stress Testing Understanding stress test objectives Step-by-step process review – eight steps Stress testing summary Developing Deposit, Off Balance Sheet and Other Liquidity Stress Test Assumptions Key elements, drivers and sources Cash flow from securities Cash flows from loans Cash flows from liabilities A Three step process for estimating cash flows from deposits and non-deposit liabilities - Multi-factor scoring model - Rankings - Application of historical data Assumptions for loans from and to financial institutions Quantitative tools for estimating cash flows from off balance sheet commitments - Methods for 8 categories of off balance sheet exposures More thorny issues Consistency and escalation Worksheets for documenting and managing assumptions Liquidity Funding Crisis Case Studies Northern Rock IndyMac Bear Stearns BEA Wachovia Bank Dexia Bank Day 3 ALM Risk Modeling and Management Effective Risk Modeling Choosing models Data requirements Using models Back testing your earnings forecast and components Back testing EVE components Model risk Understanding model risk and the life cycle of models Regulatory requirements for models and model validations Managing Interest Rate Risk IRR management overview Risk minimization versus risk positioning Managing interest rate risk without derivatives Managing interest rate risk with derivatives: Learn the role and overview of (OTC) derivatives in exposure management Optimizing EaR and EVE Differences between risk management tactics and strategies - Hedge accounting issues for macro and micro hedges Managing Liquidity Risk Tactics and strategies The connection between stress tests and balance sheet management - Managing time Concentration / diversification overview Liability diversification: the good, the bad and the ugly - Diversification by number of sources - Diversification by type of source - Diversification by size - Volatile liability concentrations Managing the stress testing process: what not to do Liquidity Contingency Planning and Event Management Overview and requirements for best practice contingency plans Early Warning / key risk indicators / key performance indicators including over 30 internal and external indicators of balance sheet risk, credit risk, funding risk, concentrations and diversification Invocation and Escalation Identifying and estimating secondary sources of funds Linking stress tests to contingency planning The event management committee Confidence management Internal and external communication Plan testing Effective Risk Governance – Concepts and Structure Risk appetite: top down methods, bottom up methods and synthesis Risk Culture Risk management organizational structure and the role of treasury - Traditional treasury organization - CRO organization structure - Alternatives and examples - Centralized or decentralized - Consolidated or unconsolidated Risk strategies Risk limits - Risk limit overview - IRR limits - Liquidity risk limits - Hard and soft limits - Hard limits versus soft limits Effective Risk Governance - Practices and Tactics Building a better ALCO Best practice reports to improve the effectiveness of risk managment - Interest rate risk reports - Liquidity risk reports Risk management oversight Role of internal audit in risk management Best practice policies - Contents of interest rate risk policy - Contents of liquidity risk policy Governance summary Day 4 ALM Risk Governance, Application to Capital and Earnings Basel III and Global regulations Liquidity Regulation Basel III Liquidity Coverage Ratio: requirements and problems Basel III Net Stable Funding Ratio: requirements and problems Basel III Other metrics Basel III Summary Overview of FTP, LFTP and RAROC Introduction to FTP Pricing goals Regulatory requirements for liquidity FTP Conceptual requirements for liquidity FTP LFTP for mismatch liquidity risk - Standard method - Problems, advantages and disadvantages LFTP for contingent liquidity risk - Simple method - Alternative method - Other approaches Combining the LFTP pieces Best practice LFTP recommendations Introduction to Risk Adjusted Return on Capital --- enhancing capital management and performance measurement Liquidity Stress Simulation One computer with spreadsheet software such as as MS Excel ®will be required for every four attendees. Course summary and close