This training course provides an overview of the ALM (Asset Liability Management) issues through the analysis of its two main components: bank liquidity risk and interest rate risk

Learning Objective:

• At the end of this session, participants will be able to:
• Identify key components of the ALM and how to take advantage of both the liquidity and interest risks in the market.

Course Outline

• Structure of bank balance sheet
  • Detailed description of asset items, liability items, and off-balance sheet items
  • Difference between economic, prudential and accounting management
  • Distinction between banking book and trading book
• Application: presentation of various banking books (retail bank, capital markets bank)
• Fundamental principles of Asset Liability Management
  • Aims of ALM : input/output balance
  • Modelling the evolution of several assets and liability types : outflow conventions, production hypotheses
  • Review of the ALM risk types : liquidity risk, interest rate risk, credit risk, forex risk
  • Factoring in of the ALM risks by the Basel II and IFRS frameworks
  • Impact of the current financial crisis and of current evolutions
• Assessment of the bank liquidity risk
  • Regulatory constraints : liquidity coefficient and observation coefficients
  • Determination of the static liquidity gap
  • Analysis of liquidity sources and modelling of their mechanisms
  • Interaction between liquidity risk, credit risk and market risk
• Hedging the liquidity risk
  • Hedging short term liquidity risk : REPO operations, securitization
  • Optimization and diversification of the refinancing policy in the mid-term/ long term
  • Implementation of stress tests and simulation of a liquidity crisis : techniques, examples
• Definition and impact of interest rate risk
  • Definition and measurement scope of bank interest rate risk
  • Sources or interest rate risk : displacement or distortion of the yield curve, basis risk, liability and asset-incorporated options, off-balance sheet items
  • Assessment of the interest rate risk : fixed interest rate gap and indexed interest rate gap
  • Sensitivity of the Net Interest Margin (NIM) and of the balance sheet's Net Present Value (NPV)
• Hedging interest rate risk
  • Implementation of a limitation system for the general interest rate risk
  • Introduction to the Earnings at Risk (EaR) and economic Value at Risk (VaR)
  • Implementation of stress tests based on various unfavourable scenarios
  • Best practices on the basis of the Basel II committee recommendations