An introduction to banking liquidity risk and asset-liability management pdf

Breaking this goal of ALM down, this means accomplishing three key objectives:. A primary function of ALM is generating earnings. Financial institutions have very specific financial goals. Key profitability outputs ALM measures include net interest income, return on assets, and return on equity. Within those outputs are metrics like yield on earning assets, cost of funds, non-interest income, and non-interest expense that drive bottom-line profitability figures. An effective ALM process will consider different strategies and approaches and measure the potential impact on profitability.

For example, if an institution wants to venture into a different type of lending to try to increase yield on earning assets, it will want to measure the potential yield from those new products as well as the cost of funding those assets and all related costs of obtaining that new business in the first place. It will look at the cash flows in and out of the institution to determine whether certain approaches will help meet the desired margin, ROA, and most importantly, ROE, which is a measure of shareholder return or, for credit unions, a measure of the ability to provide continued or additional value to members.

The idea of going into the marketplace and figuring out how to make more money is probably appealing to a lot of folks. Risk in the context of ALM is the difference between expected cash flows versus and actual cash flows. The logical example here is credit risk. While credit risk is probably the most intuitive example of risk that institutions face, there are many types of risks that need to be considered. Three main risks institutions face:. No institution is putting all its eggs in the highly volatile commercial real estate CRE basket due to the potential volatility of the cash flows in those products.

Institutions are constantly walking a tightrope of generating enough return without exposing themselves to excessive risk. An effective ALM model will help measure the level of potential risk in different market conditions to help decision-makers discern which strategies show the opportunity to create enough return to meet desired goals while also actively managing risks that could jeopardize the safety and soundness of the institution.

Bank and credit union leaders are also acutely aware of regulatory expectations in terms of providing assurances of the long-term viability and solvency of the institution. Usually expressed in the form of regulatory capital ratios, these ratios ensure institutions have enough capital to withstand adverse financial or economic scenarios.

After the great recession in the late s, regulatory expectations of capital levels are higher than ever, which can lead institutions to be conservative in terms of risk-taking. Sure, a financial institution could use its ALM model to avoid risk.

One of the goals of ALM is to manage risk, not actively avoid risk. It is just a matter of what types of risk and how much of those risks an institution is willing to take. Like personal investors, institutions all have different risk appetites. Once established, these policy limits act as a roadmap for the level of risk that can be undertaken while maximizing profitability. As one could probably imagine, the complexity and sophistication of ALM models vary from institution to institution.

However, most banks and credit unions typically steer toward one of two main approaches to the ALM function: a regulatory approach or a management approach.

This approach is geared toward meeting those expectations, at least minimally. Written in the author's trademark accessible style, this book is a succinct and focused analysis of the core principles of good banking practice. A practical guide to counterparty risk management and credit value adjustment from a leading credit practitioner ….

Understand and interpret the global debt capital markets Now in a completely updated and expanded edition, …. The most complete, up to date guide to risk management in finance Risk Management and Financial …. The essential reference for financial risk management Filled with in-depth insights and practical advice, the Financial ….

The importance of banks to the world's economic system cannot be overstated. The foundation of consistently successful banking practice remains efficient asset-liability management and liquidity risk management.

This book introduces the key concepts of banking, concentrating on the application of robust risk management principles from a practitioner viewpoint, and how to incorporate these principles into bank strategy. Written in the author's trademark accessible style, this book is a succinct and focused analysis of the core principles of good banking practice. A practical guide to counterparty risk management and credit value adjustment from a leading credit practitioner ….