A product of the author’s extensive research work, this book presents an advanced method for optimizing Asset Liability Management as a solution to the regulatory and economic challenges faced by banks today. This practical method is a step-by-step process for modeling and reshaping a bank’s balance sheet that entails application of a quantifiable optimization method to help maximize asset return and minimize funding cost in the banking book, and subsequently describes the Funds Transfer Pricing (FTP) process as a mean to achieve the target position of a bank. The book will also discuss detailed concepts of ALM, IRRBB, the FTP framework, and strategies for active management, structuring and hedging of a balance sheet.
Highlights of the book include:
- The evolving role of the ALM function and target position of the banking book
- Regulatory requirements – Basel III
- Maturity Gap analysis
- The role of the Funds Transfer Pricing in banks
- Customer behavior and its impact on interest rate risk and liquidity risk
- Model risk and sensitivity analysis
- Case studies illustrating concepts and applications
BEATA LUBINSKA, PhD, is a financial engineer with over 15 years of practical experience gained in international financial institutions such as GE Capital, Deloitte and Standard Chartered Bank based both in Milan and London. She is a Treasurer at Allica Bank focused on proactive management of financial risks and Balance Sheet Management, and a member of the BTRM Faculty founded by Professor Moorad Choudhry in London. She is the author of Asset Liability Management Optimisation: A Practitioner's Guide to Balance Sheet Management and Remodelling, also published by Wiley. Beata holds a PhD from Wroclaw University of Economics in Poland.
Foreword
Introduction
Chapter 1. What is IRRBB and why it is important?
Subcategories of Interest Rate Risk
Regulatory overview for IRRBB – what has changed?
ECB 2017 IRRBB stress test
Interest rate shocks
Chapter 2. How to identify and measure Interest Rate Risk in the Banking Book?
Identification of IRRBB - case studies
Dual nature of IRRBB
Exposure to short-term interest rate risk – Maturity Gap analysis
Maturity gap analysis from the economic value perspective
Time bucket sensitivity analysis – PV01
Duration gap analysis
IRRBB metrics
Credit Spread Risk in the Banking Book (CSRBB)
Chapter 3. How to manage IRRBB?
Hedging Instruments for IRRBB
Why consider interest rate swap?
Natural hedging and hedging through derivatives.
Hedging strategies
Chapter 4. Behavioralisation of items without deterministic maturity and their impact on IRRBB
Significance and impact of the behavioural issues in the Banking Book
The reason for modelling CASA under IRRBB
The impact of early redemption of fixed rate assets on IRRBB
Approaches for the modelling of NMDs
Approaches for the modelling of statistical prepayment on the asset side
Model risk
Chapter 5. Interest Rate Risk and Asset Liability Management
Management of IRRBB under strategic ALM – proactive management of IRRBB
Setting up the target profile and integrated management of liquidity and interest rate risk through the application of numerical optimisation technique.
Setting up the funding strategy for a bank taking into consideration the hedging requirements.
IRRBB and Funds Transfer Pricing
Comprehensive and feasible IRRBB strategy
Management of the intragroup interest rate risk
Chapter 6. IRRBB stress test, reverse stress test and ICAAP
IRRBB stress testing
ICAAP – assessment of the internal capital to cover IRRBB
Chapter 7. IRRBB governance and framework
Risk Appetite Statement (RAS)
Appendix 1. Illustrative example of IRRBB policy.
Appendix 2. Illustrative example of IRRBB model manual.
References
Other versions by this Author