ALM in the Context of Enterprise Risk Management

Koos Timmermans and Wessel Douma

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