Asset Liability Management Optimisation

BEATA LUBINSKA is a Founder of BL Advisory & Consulting, a boutique firm based in London. Previously, she has worked in senior positions in a number of financial services companies such as GE Capital, Deloitte, Standard Chartered Bank, and MeDirect Group in London, where her focus was mainly on Interest Rate Risk in the Banking Book (IRRBB), Market Risk, Balance Sheet Management, and Funds Transfer Pricing. She has over 16 years of practical experience developed in the Asset Liability management space gained both in Milan and London. Beata is also a faculty member at The Certificate of Bank Treasury Risk Management, where she teaches optimisation techniques in Asset Liability Management. She holds a PhD in Finance from Wroclaw University of Economics.

• Foreword ixAbout the Author xiIntroduction xiiiChapter 1 ALM of the Banking Book 1The Role of Asset Liability Management in Commercial Banks 1Overview of Financial Risks Existing in the Banking Book 7Regulatory Requirements – Basel III 13Capital Requirements According to Basel III/CRD IV 17Selective Review of the Literature Related to ALM and Integrated Management of the Interest Rate Risk and Liquidity Risk in Commercial Banks 19Chapter 2 Methods of Measurement and Management of the Interest Rate Risk and Liquidity Risk 23Interest Rate Risk in the Banking Book – Measurement and Management 24Exposure to Short-Term Interest Rate Risk – Maturity Gap Analysis 24Maturity Gap Analysis from the Economic Value Perspective 33Liquidity Risk in the Banking Book – Measurement and Management 41Short-Term Liquidity Management Principles 45Medium Long-Term Liquidity – The Principles of Structural Liquidity Management 46The Role of Funds Transfer Pricing in Banks 50Pricing of Different Products in the Banking Book 54Behaviouralisation Concept in FTP 57Chapter 3 Customer Behaviour and Its Impact on Interest Rate and Liquidity Risk 61Significance and Impact of Behavioural Issues in the Banking Book 61Modelling of Customers’ Deposits – Liabilities Side 63Balance Sensitivity Modelling 68Modelling of Loans with Early Redemption Optionality –Assets Side 70Statistical Prepayments 70Financial Prepayments 71Chapter 4 Formulation of the Optimisation Process and Articulation of the Decision Model 73The Optimisation Method Applied to the Banking Book 74Introduction of the Optimisation Concept 75Definition of the Initial Banking Book Profile 79Building the Objective and Constraint Functions in the Optimisation Process 81The Importance of Model Sensitivity Analysis 96Definition of the Sensitivity Parameters for the Optimisation Model 98‘Significant Changes in Interest Rates’ Scenario 98Changes in the Initial Proportions of the Asset Base 100Changes in the Output of the Deposit Characterisation Model – Balance Volatility, Balance Sensitivity, and Average Life of the Product 100Introduction of the CPR into the Model 100Chapter 5 Practical Example of the Optimisation Process and Quantification of the Economic Impact under Base and Stress Scenarios 101Case Study: Economic Impact from the Optimisation Model under Baseline and Sensitivity Scenarios for Bank 1 102Case Study: Economic Impact from the Optimisation Model under Baseline and Sensitivity Scenarios for Bank 2 114Conclusions 125Appendix 1 Details of the Analysis Performed for Bank 1 129Appendix 2 Details of the Analysis Performed for Bank 2 157Bibliography 209Index 213