ALM in the Context of Enterprise Risk Management
Koos Timmermans and Wessel Douma
Introduction
Bank Capital and Liquidity
ALM in the Context of Enterprise Risk Management
The New Basel Standards on IRRBB and Their Implications for ALM
Measuring and Managing Interest Rate and Basis Risk
The Modelling of Non-Maturity Deposits
Modelling Non-Maturing Deposits with Stochastic Interest Rates and Credit Spreads
Managing Interest Rate Risk for Non-Maturity Deposits
Replication of Non-Maturing Products in a Low Interest Rate Environment
Managing Mortgage Prepayment Risk on the Balance Sheet
Considerations for ALM in Low and Negative Interest Rate Environments
Credit Spreads
Hedge Accounting
Supervisory Views on Liquidity Regulation, Supervision and Management
Measuring and Managing Liquidity and Funding Risk
Managing Reserve Assets
Instruments for Secured Funding
Asset Encumbrance
Capital Management
A Global Perspective on Stress Testing
Reverse Stress Testing: Linking Risks, Earnings, Capital and Liquidity – A Process-Orientated Framework and Its Application to Asset–Liability Management
XVAs and the Holistic Management of Financial Resources
Optimal Funding Tenors
Funds Transfer Pricing in the New Normal
Balance-Sheet Management with Regulatory Constraints
One of the lessons learned by banks during the global financial crisis in 2008–9 was that banks need to have in place a comprehensive risk appetite framework, which is based on the principle that banks should be able to restore their capital and liquidity positions following a stress situation, as it may take years before full access to capital and funding markets is re-established. Regulators picked up on this by implementing, for example, the Capital Requirements Regulation (CRR) and the Capital Requirements Directive IV (CRD IV), which led to new and much stricter capital and liquidity requirements than before. Furthermore, national competent authorities and the European Central Bank have raised the bar significantly with respect to the required quality of the banks’ risk appetite frameworks. Therefore, most banks have put a considerable amount of effort in the improvement of their risk and asset and liability management (ALM) processes, frameworks and governance.
In this chapter we provide an insight into the main solvency risks banks are confronted with, and the necessary components of the processes to deal with these. The first section is dedicated to the governance: how
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