The ALM – learning roadmap covers basic tools, concepts & capital adequacy requirements, reports and techniques. The 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.
What are the prerequisites?
Basic Tools
The Asset Liability Management guide begins by first reviewing some preliminary topics. These include:
- Calculating Value at Risk (VaR)
- Duration & Convexity Calculation Example
- Building Maturity & Liquidity profiles for Deposits and Advances book for ALCO (ALM), ICAAP & IAS 30 reporting
ALM and Regulatory Environment
In addition to these prerequisite topics, the ALM – learning roadmap also reviews how the Asset Liability Management (ALM) process is addressed in the current regulatory environment for capital adequacy requirements. This includes the assessment of capital charge for market, interest rate mismatch and liquidity risks addressed as part of the ICAAP process and the liquidity risk regulations introduced in Basel III:
- 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
What topics are covered?
Once the pre-requisite topics and relevant regulatory environment have been covered, the ALM – learning roadmap delves into the course in two stages:
The first stage is a high level overview of ALM concepts and basic calculations covered in the “ALM training for Board & ALCO members” course.
The second stage is a detailed dive into the measurement methods and reports. These Asset Liability Management (ALM) measurement tools and applications include:
- Duration
- Convexity
- Rate Sensitive Gaps, Earnings at Risk (EAR), Cost-to-Close (Interest Rate Gap) and Market Value of Equity (MVE) Analysis
- Cost-to-Close Liquidity Gap Methodology
- Cost-to-Close Example
- Price Sensitive Gap, Liquidity Gap, Net Interest Income (NII) at Risk and Duration Gap Analysis and applications of ALM , such as cash flow matching, portfolio dedication and immunization
This is followed by a discussion of liquidity risk, liquidity ratios and analysis, liquidity limits and the liquidity contingency plan:
- Liquidity Management: Liquidity Risk
- Liquidity Management Crash Course: Liquidity Limits
- Liquidity Management: Liquidity Contingency Funding Plan
What are the additional topics I can read up on?
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
Premium Content:
- ALM – Crash Course – 3rd Edition
- ALM – Crash Course – EXCEL Examples
- Asset Liability Management (ALM) Crash Course – Package
- ILAAP, ALM, LCR, NSFR Report validator
- Black Derman Toy Model Construction – EXCEL Example
- Black-Derman-Toy (BDT) Interest Rate Model – Package
- Building Maturity & Liquidity Profiles for Deposits and Advances
- Calibration of CIR Model – EXCEL Example
- Calibration of Black Derman Toy (BDT) Interest Rate model to US Treasuries
- Cox-Ingersoll-Ross (CIR) Interest Rate model – EXCEL example
- Duration Convexity – EXCEL Example
- Duration and Convexity for US Treasury Bill, Note and Bond
- Heath Jarrow Merton – HJM 3 – Factor Interest Rate Model
- Heath Jarrow Merton (HJM) Interest Rate Model – Package
- How to construct a Black Derman Toy Model in EXCEL
- How to utilize results of a Black Derman Toy Model – EXCEL Example
- How to utilize results of a Black Derman Toy Model
- Interest Rate Simulation Crash Course
- Interest Rate Simulation Crash Course – Package
- Principal Component Analysis – PCA – US Treasury Yield Rates