AssetLiability Management
Also available as onlinecourse upon request at a reduced
fee
Duration: 3 days
 Objectives and Organization of ALM
 Interest Rate and Spread Analysis
 GAP and Duration GAP Analysis
 Analyzing NonMaturing Assets and Liabilities
 ValueatRisk and Regulatory Capital Assessment
 Managing Interest Rate Risk with Derivatives
 Funding and Liquidity Management
 Fund Transfer Pricing
The objective of this seminar is to give you a good understanding of AssetLiability Management as a
tool for managing an institution’s balance sheet in pursuit of the optimal balance between revenues and
risks.
We start with an introduction to ALM, and we discuss the objectives and means of ALM. We also give an
example of how ALM is organized in a typical bank.
Next, we explain important concepts such as margin, spread, leverage, surplus, and balance sheet risk.
We look at the balance sheets of “typical” institutions and discuss the funding/investment requirements
and constraints that arise from the business nature of these institutions.
We then look into how interest rate risk can be measured and managed within the ALM framework. We
explain and discuss measures such as Net Interest Income (NII), GAP, and Duration GAP. We also present
and explain models for measuring interest rate risk on nonmaturing assets and liabilities (e.g. demand
deposits) and for measuring “ValueatRisk” of trading assets and liabilities.
Further, we explain how interest rate risk can be managed using derivative instruments such as FRAs,
swaps and interest rate options. We explain how “macro swaps” are used by banks to hedge interest rate
risk at the balance sheet level, and we show how caps, floors and swaptions can be used to manage the
explicit and embedded option risks of a bank’s assets and liabilities.
We then present and explain tools for assessing liquidity risks, including liquidity ratios, cash flow
projections and the “liquidity curve”. We look in detail into liquidity risk measurement within a
financial institution using liquidity modelling, liquidity stress testing and long term liquidity
profiling. We explain how liquidity risk can be managed in an ALM context. We review the latest
regulatory developments for liquidity risk management, and we present liquidity management tools,
including “contingency planning” and financing instruments such as repos and money market
facilities.
Finally, we look at liquidity costs and liquidity pricing factors, and we explain the process of
“liquidity transfer pricing” in an ALM context.
Day One
09.00  09.15 Welcome and Introduction
09.15  12.00 Introduction to ALM
 ALM – a Strategic Management Tool
 The Use of ALM in Banks
 The ALCO and the ALCO process
 Case Study: ALM Organization, Policies and Procedures in a Large Bank
Interest Rate and Spread Analysis

Profitability and Interest Rate Risk
 Margins, leverage and ROE
 Maturity transformation risk
 Spread risk

Interest Rate Risk in the Banking Book
 Basel Pillar II requirements
 NPV Risk vs. “Repricing” Risk

GAP Analysis
 Static GAP
 Dynamic GAP
 Case: GAP analysis in “NoHope Bank “
 Exercises
12.00  13.00 Lunch
13.00  16.30 Interest Rate and Spread Analysis (continued)

Simulation Method
 Simulating NII
 Simulating effect of product mix and pricing
 Monte Carlo simulation

Duration Analysis
 The economic value of assets and liabilities
 Duration explained
 Duration GAP and duration of equity
 Case study: Duration analysis in “NoHope Bank”

Measuring Interest Rate Risk of NonMaturing Assets and Liabilities (NoMALs)
 Types and characteristics of NoMALs
 The annuitymargin approach
 Stochastic programming model
 Calculating duration and convexity of NoMals
 Constructing replicating portfolios
 Case study: NoMALs in “NoHope Bank”
 Analyzing Prepayment Risk
 Exercises
Day Two
09.00  09.15 Recap
09.15  12.00 Measuring Interest Rate Risk in the Trading Book
 Basel Pillar I Requirements
 General vs. Specific Interest Rate Risk
 The Maturity and Duration Approaches

ValueatRisk Analysis
 ValueatRisk for bonds and other primary instruments
 ValueatRisk for interest rate derivatives

Yield Curve Analysis
 Key rate duration
 Principal components analysis
 Diversified ValueatRisk
 Case: ValueatRisk in “NoHope Bank”
 Exercises
Managing Interest Rate Risk

Structural Management
 A/L mix and pricing
 Balance sheet reengineering

Portfolio Strategies
 Matching, immunization, active management
12.00  13.00 Lunch
13.00  16.30 Managing Interest Rate Risk (Continued)

Using Derivatives for Interest Rate Risk Management
 Using FRAs and futures to manage repricing risk
 Using interest rate swaps to hedge cash flow risk
 Using interest rate swaps to hedge fair value risk
 Using “macro swaps” to hedge assets/liabilities at the bank level
 Using interest rate options to cap funding costs
 Using interest rate options to hedge explicit and embedded optionality of assets and
liabilities
 Managing prepayment risk
 Managing multidimensional and contingent IRR

Accounting Issues
 Accounting treatment of derivatives under IFRS/US GAAP
 Hedge accounting: cash flow vs. fair value hedges
 Treatment of macro hedges
 Case Study: Using Derivatives in “NoHope Bank”
 Exercises
Day Three
09.00  09.15 Recap
09.15  12.00 Liquidity Management
 An ALM Framework for Assessing Liquidity Risk

Factors that Affect Bank Liquidity
 Financial market access
 Balance sheet structure and earnings

Balance Sheet Analysis
 Core vs. noncore deposits
 Availableforsale vs. heldtomaturity securities
 Sources of Cash Flow Uncertainty
 Assessing Liquidity Risk Using Balance Sheet Ratios
 Assessing Liquidity Risk Using Stochastic Cash Flow Mismatch Analysis

Basel III Regulatory ratios
 Liquidity coverage ratio
 Net stable funding ratio

Managing Liquidity Risk
 A framework for managing liquidity risk
 Managing market access
 Contingency planning
 Foreign currency liquidity management
 Practical Case Studies and Exercises
12.00  13.00 Lunch
13.00  16.30 Liquidity Pricing and Fund Transfer Pricing
 Reasons for Liquidity Costs

Defining Liquidity Costs and the Pricing Factors
 Structural liquidity costs
 Contingent liquidity costs

Liquidity Traders View
 Long vs. Short cash
 Rate paid vs. Rate achieved
 Balancing the Costs of Overfunding/Underfunding
 Liquidity Cost Curves

Fund Transfer Pricing
 Transfer prices for liquidity
 Liquidity pricing for specific asset and liability classes
 The role of ftp in economic capital allocation and risk adjusted performance
measurement
 Practical Case Studies and Exercises
Evaluation and Termination of the Seminar
