This course introduces the problems of asset liability management in banking in both methodological and practical terms.
A bank’s asset liability management seeks to measure and hedge interest rate and balance sheet liquidity risk, and particularly the risks generated by the bank’s commercial transactions (loans, credit lines, client deposits, savings accounts etc.).
As these transactions are not generally within a financial market (in which they could be returned), the question of interest rate risk hedging does not arise in the same terms as for bonds and negotiable securities in the markets. For this reason, and for other accounting and regulatory reasons, balance sheet rate risk management has specific features and cannot be reduced to "delta hedging" as taught in finance courses.
In addition, as transactions with clients are involved, it is essential to be able to model the clients’ behaviour, which ultimately means that ALM calls for a compound approach including interest rate models, statistical behavioural models and actuarial calculus.
- Introduction –A bank’s balance sheet, off balance sheet
- Liquidity risk and liquidity gaps –Concept of liquidity flow and new production, net interest margin, liquidity gap, measuring liquidity risk.
- Interest rate risk and rate gaps –Measuring interest rate risk, rate gaps, modelling client rates, simple gap hedging with swaps and futures.
- Modelling flow in balance sheet headings –Modelling early repayments, property savings plans, current account deposits. Modelling and hedging hidden options.
- Internal transfer prices –Methodology for calculating internal transfer rates, processing margin, controlling a network with internal transfer rates.
- Techniques for hedging balance sheet rate risk.
Adam, A. (2007), Handbook of Asset and Liability Management, Wiley
Augros, Queruel (2000), Risque de Taux d’intérêt et Gestion Bancaire, Economica
Bessis, J. (2002), Risk Management in Banking, Wiley
Crouhy, Galai, Mark (2001), Risk Management, McGraw-Hill
Demey P., Frachot A. et Riboulet G. (2003), Introduction à la Gestion Actif-passif bancaire, Economica
Dubernet (1997), Gestion Actif Passif et Tarification des services bancaires, Economica
Dupré, D. et El Babsiri, M. (1997), ALM: techniques pour la gestion actif-passif, Editions Eska