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