Asset Liability Management – Guide for Dummies & Learning Road Map
The Asset Liability Management (ALM) process is used to manage the business and financial objectives of an institution by assessing and evaluating assets and liabilities on its portfolio in an integrated manner. It is a continuous process involving the formulation, implementation, review and subsequent revision (if needed) of asset and liability management strategies to ensure that they are within the acceptable risk tolerance levels. It primarily and traditionally addresses interest rate mismatch and liquidity risks through tools such as duration and convexity metrics, and value at risk based concepts such as Earnings at Risk and Market Value of Equity.
We begin the Asset Liability Management (ALM) course by first reviewing some preliminary topics that will be applied within the course. These include:
In addition to these prerequisite courses we also review how the Asset Liability Management (ALM) process is addressed in the current regulatory environment for capital adequacy requirements as outlined in Basel II and the changes that Basel III will bring to the existing capital framework in particular with regard to liquidity risk regulations:
- Internal Capital Adequacy Assessment Process (ICAAP) – Overview and Core Concepts
- Basel III: Basel II Framework Revisions
- Basel III – Liquidity Framework – Reforms to Global Liquidity Risk Regulations
Once a review of the prerequisite topics has been covered you can now move on to the main Asset Liability Management Course. This course covers Asset Liability Management (ALM) measurement tools such as Duration, Rate Sensitive Gaps, Earnings at Risk (EAR), Cost-to-Close Interest Rate Gap, Cost-to-Close Liquidity Gap, Market Value of Equity (MVE) Analysis, Price Sensitive Gap, Liquidity Gap, Net Interest Income (NII) at Risk and Duration Gap Analysis. We consider applications of cash flow matching, portfolio dedication, immunization and see how convexity is used in the ALM process. We discuss liquidity risk, liquidity ratios and analysis, liquidity limits and the liquidity contingency plan:
We then review some simple ALM stress tests for liquidity and interest rate risks:
For a more detailed discussion on the liquidity risk management process you may also like to review the following posts:
- Liquidity Risk Management –A framework for estimating liquidity risk capital for a bank
- Basel III enhancement- Linking liquidity crisis with Liquidity Coverage Ratio and Stable Funding Ratios
- Liquidity Risk Management Case Studies
Other topics related to the Asset Liability Management (ALM) process include:
- Interest Rate Simulation Crash Course
- Setting Counterparty Limits, Market Risk Limits & Liquidity and Interest Rate Limits
Finance training video courses related to ALM are also available for sale:
In addition to the html version of the courses mentioned above, the following ALM-related courses, pdf files and excel examples, are also available for sale at our online Finance Course Store:
PDF courses available for sale
- ALM – Crash Course
- ICAAP – Overview & Core Concepts
- Basel III – Liquidity Framework
- Calculating VaR – includes case study
- Interest Rate Simulation Crash Course
- How to construct a Black Derman Toy Model in EXCEL
- How to utilize results of a Black Derman Toy Model
- Setting Limits
- ICAAP Sample Report Template & Executive Summary
EXCEL examples available for sale
- ALM Crash Course – EXCEL Example (Examples include: Cost to close liquidity gaps, Cost to close interest rate risk, Earnings at risk, Market value of equity)
- Duration Convexity Example
- Calculating VaR –EXCEL Example
- Calibration of the CIR Model Example
- Black Derman Toy Model Construction – EXCEL Example
- How to utilize the results of a Black Derman Toy Model –EXCEL Example
- Heath Jarrow Merton – HJM 3 – Factor Interest Rate Model
- Principal Component Analysis – PCA – US Treasury Yield Rates
