Bank – Asset Liability Management

The course begins with a definition of asset liability management and associated interest rate and liquidity risks and other measures such as duration, convexity, volatility, asset and liability sensitivity and Value at Risk. It presents the core steps for building an ALM model and explains how the model links balance sheet and P&L items to a valuation model, an interest rate generator and calculation engine to generate a number of ALM reports that are presented to the Board of Directors (BOD) and management.

Next exposure, risk and target accounts and the various parts of an ALM framework which have an impact on shareholder value and income are discussed. This is followed by a detailed walkthrough on how Fall in Market Value of Equity, Earnings at Risk, Cost to Close, Rate Sensitive Gap, Duration Gap are calculated. An overview of other ALM reports such as price sensitive gap, net interest income (NII) and liquidity gap is given. The results from the various reports are discussed and compared. Applications for explaining immunization and portfolio dedication are presented.

The course concludes with 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.