In 2018 new Basel standards were introduced for measuring and managing interest rate risk on the banking book (IRRBB). One of the complexities of interest rate risk on the balance sheet is the linkage between Asset Liability Management (ALM), Liquidity (LRP, NSFR), and the IRRBB. A further complication is that interest rate risk of the balance sheet can be measured either through current and future earnings (i.e. Net Interest Income NII) or through changes in Economic Value Added (EVA).
In the ALM & IRRBB: Optimizing the Balance Sheet program we develop a framework of how to integrate these synergetic areas. You will learn the key building blocks of IRRBB, including analytical modeling, data requirements, and governance. We will also explore how the Fundamental Review of the Trading Book (FRTB) is an overlapping framework of IRRBB as both capture interest rate exposure and dynamic hedging strategies. We will design a toolkit of stress testing scenarios and spend the final day on real-life case studies, focusing on historical bank failures that involved a combination of interest rate risk, behavioral changes, and triggers of contingent obligations (margin calls, systemic risks, failures in the governance of ALCO). We will also assess what the supervisory process of regulators will be and how to prepare for this examination.
How you will benefit
- Gain insight into IRRBB regulation and how to implement it
- Gain an understanding of how IRRBB is linked to other overlapping frameworks (ALM, Liquidity, Trading)
- Discover how a key to IRRBB lies in the consistency between Economic Value Added (EVA) and earnings (NII)
- Learn how Net Interest Income (NII) derived from IRRBB is a core component of capital stress testing of the regulators (Europe, UK and USA)
- Get a deeper understanding of how interest risk is linked to IFRS(9) and expected credit losses
- Learn how to apply behavioral assumptions and optionality models to contractual cash flows as a cornerstone of interest risk
- Learn why static balance sheets for any form of stress testing or forecasting have many pitfalls
- Learn how to overlay business strategy in lending and how liability management impacts interest rate risk
- Explore the design of interest rate scenarios and the dynamics of the balance sheet
- Learn how to correctly hedge the balance sheet utilizing derivatives and securitization
- Learn more on governance, disclosure and comprehensive regulatory examination including the Asset Liability Committee (ALCO)
- Learn how to minimize risk weighted assets for an institution
|Day 1||09:00 – 17:30|
|Day 2||09:00 – 17:30|
|Day 3||09:00 – 17:30|
- The overall regulatory and risk architecture and how IRRBB fits in
- The overlapping frameworks of IRRBB, ALM, Liquidity, and FRTB
- Designing IRRBB analytics and leveraging off ALM and traditional market risk
- The consistency between the methodology measuring earning at risk and Economic Capital through the dynamic evolution of the balance sheet
- Categorization of bank instrument categories into amenable instruments with no optionality (term deposits), less amenable with automatic optionality such as caps, floors, swaptions and other embedded options and finally non-amenable instruments with Behavioral Optionality (such as non-maturity deposits), core versus transitory deposits and overdraft facilities
- Asset Liability Management and the management of Liquidity and Cash Flow management; Hedging with derivatives Link to risk appetite
- The Business Model, balance sheet capacity, legal entity & optimization of the balance sheet and link to shareholder value
- BCBS standards including IRRBB management process, model validation, enhanced disclosure requirement sand supervisory review
- Designing a framework for liquidity and capital stress testing under different interest rate risk shocks including basis risk, term structure risk, and behavioral risks
- The Treasury factory; put into the context of the overlapping frameworks, financial transfer pricing (FTP), capital allocation and balance sheet optimization
- Case studies throughout the program – will provide us with insight into how the balance sheet/off balance sheet is impacted. It is never the case that one single shock causes the major problem but rather the shocks in stress are highly correlated involving both internal and external shocks. Only a holistic ALM/ liquidity /trading framework enables us to understand this connectivity.
- S&L crisis in the 1980s-1990s in which one third of the US savings and loans institutions (over 1000) failed and cost the taxpayer an estimated $160 billion: we will show that a key to the failure was a steepening of the yield curve in which net interest margins collapsed (Lincolns, Home State Savings Bank). In today’s modern bank, how could this have been avoided.
- Continental Illinois 1984 and Washington Mutual 2008: in both cases the banks failed due to deterioration of investments/ lending in highly risky assets.
- Sovereign uncertainty: depositors at the Bank of Cyprus lost close to 50% in the value of their savings during the Eurozone crisis in 2013 despite assurances from the IMF and ECB.
- Unexpected triggers/draws: the case of Fin Corp. a real estate trust suddenly stopped accepting loan applications; it was the second largest prime loan originator and its share price collapsed. It also failed to meet regulatory capital requirements.
- Deposit runs of the type from the 1929 big crash happened again in the UK at Kaupthing and Northern Rock. We will study the role of securitization, the behavior of a traditional lender, Northern Rock and the role of the Bank of England.
- Margin call: we will explore the cases of Bear Sterns, Lehman Bros, LTCM and AIG. In each case margin calls sunk the financial institution perpetuating failure. Indeed in the LTCM hedge fund case the collapse of a small fund might have triggered a systemic collapse.