Begins with a description of how the revenue generation mechanism of a bank works. Asset liability management (ALM) and associated interest rate and liquidity risks are defined. Duration and convexity are calculated for which accompanying EXCEL examples are also provided.
In order to understand the various yield curve shapes, shifts and outlooks, a review of the historical US yield term structures is conducted. This is followed by a look at various ALM strategies, in view of future expected interest rate outlooks, and their impact on the maturity distributions of assets & liabilities of banks.
Next, the various assumptions used in an ALM model are assessed, followed by an explanation of price and rate gaps with some basic illustrations to understand the concepts of net interest income at risk and market value at risk.
ALM reports profile cash flows by maturity or reset buckets. A methodology for building maturity and liquidity profiles for banks’ advances and deposits portfolios using the Pivot table & chart functionality in EXCEL is discussed.
Step by step methodologies for various ALM measurement tools follow. These include Fall in Market Value of Equity, Earnings at Risk, Cost to Close liquidity gap and Cost to Close interest rate gap for which accompanying EXCEL examples are also provided. An overview of other ALM reports such as rate sensitive gap, duration gap, price sensitive gap, net interest income (NII) and liquidity gap is given. Applications for explaining immunization and portfolio dedication are presented.
An EXCEL Solver based fixed income portfolio optimization model is discussed and scenarios for minimizing duration and maximizing convexity of the portfolio are presented.
A discussion of liquidity risk management measures including ratios and analyses for measuring liquidity risk, limits for managing the risk, general and specific requirements for developing a contingency funding plan and liquidity enhancement tactics for company specific and systemic crisis. A methodology for stress testing liquidity using a Value at Risk (VaR) based approach for a fixed income portfolio is also discussed.
A casestudy for assessing why bank regulations fail is presented. This simulation results based study looks at the efficacy of Capital Adequacy Ratio (CAR) as an indicator of bank performance and seeks to identify a more valuable leading indicator or target account for monitoring bank performance and health.
The following Annexures are also included as part of the course:
- Value at Risk
- Bond Risk: Calculating Value at Risk (VaR) for Bonds
- A methodology for summarizing retail and SME data
- Glossary of terms
Value at Risk with Liquidity Premium
Presents a VaR based approach for quantifying market liquidity risk with a detailed walkthrough of the accompanying EXCEL example. Market risk measures are calculated for base and stressed scenarios in turn for markets where trading volume is unlimited and where it is constrained. The latter measure produces a metric that is adjusted for market liquidity risk and inclusive of the liquidity premium.