Asset Liability Management

INTRODUCTION

The collapse of Silicon Valley Bank (SVB) highlighted once again that banks can collapse even when holding credit risk-free assets. Credit losses such as those which triggered the 2008 global financial crisis are not the only losses that can bring down a bank. Unless a bank manages its assets in conjunction with its liabilities, it can leave itself exposed to a bank run. Mark-to-market losses on unhedged fixed income portfolios become realised losses if these losses trigger withdrawals, forcing asset sales, as depositors lose confidence in the bank. Uninsured deposits magnify the risk of withdrawal since the holders of those deposits are especially aware of the bank’s financial position and the need to withdraw their deposits before a run occurs.

Bankers under the age of 50 have grown up in an environment in which interest rates have only ever gone one way – down! They now need also to learn the skills to live in a world where rates can go up, and stay up, for extended periods of time. They need to understand that interest rate risk in the banking book (IRRBB) needs to be managed as much as credit and liquidity risks. Erosion of net interest margin (NIM) can cause a bank to fail just as credit losses have triggered bank failures in the past.

This Asset Liability Management training course will examine how banks should manage their assets and liabilities to ensure they do not inadvertently find themselves exposed to the risks which brought SVB down. It will show how these risks arise and what strategies a bank needs to pursue to keep these risks within acceptable agreed limits. It will examine the stability of a bank’s funding base and assess what assets it can acquire in view of this stability. It will show, in particular, how a bank can manage the interest rate risk inherent in its non-maturity deposits and capital.

Banks will always be exposed to risks that arise from their maturity intermediation function. This Asset Liability Management training course will equip participants with the knowledge to understand how these risks arise and the skills necessary to manage them.

Objectives

• Describe the role of the Asset Liability Management function within a bank
• Examine the regulations governing Asset Liability Management issues
• Develop strategies to manage Asset Liability Management risks
• Understand how the Asset Liability Management function can contribute to maximising the bank’s return on equity while operating within the bank’s risk appetite