Asset Liquidity Management

Objectives

This course provides an introduction to ALM issues in banking, which play an essential role in the day-to-day financial management of a bank. The module is divided into two main parts – preceded by a general introduction to ALM – the first devoted to liquidity risk, the second to general interest rate risk.

In the case of liquidity risk, the aim is to define this aspect of ALM, which has been at the heart of bankers’ and supervisors’ concerns since 2007, and then to present the various measures in place today, whether these come from the supervisory authorities or from banks via their internal models. Finally, a TD will be devoted to the construction of a liquidity stress test model.

The second part of the course explains why banks are exposed to interest-rate risk, and how this risk is measured. The course then presents the models used to assess interest-rate risk, how these models are implemented and finally how they are validated. The final chapter is devoted to specific modeling examples for 2 common savings products: the current account and the home savings plan.

Each section includes tutorials in Excel/VBA. These tutorials will enable students to acquire the basic concepts needed to measure and quantify liquidity and interest rate risk.

Course outline

Introduction

Part A: Liquidity risk
I- Definition(s) of liquidity risk
– Liquidity risk (transformation risk)
– Liquidity price risk (cost of funding)
– Market liquidity risk (asset prices)

II- Sources and consequences of liquidity risk
– Analysis of the different transmission channels of a liquidity crisis
– Case studies (Northern Rock, Dexia, etc.)

III- Measuring liquidity risk
– Ratios
– Static or dynamic gap, notion of flow convention

IV- Regulations
– Regulatory ratios: French liquidity ratio, LCR, NSFR

V- Stress tests
– TD

Part B: Interest-rate risk

I- Background on ALM

II- Definition of interest-rate risk

III- Measuring interest-rate risk
– Example with a simplified balance sheet
– Interest-rate gap

IV- Hedging interest-rate risk

V- New production and balance sheet outflow

VI- Flow convention

VII- Stratification

VIII- Backtesting

IX- Examples
– Current account
– Home savings plan

Prerequisites

Not indicated