Balance-Sheet Management with Regulatory Constraints

Andreas Bohn and Paolo Tonucci

This chapter will update the reader on the variety of relevant constraints for treasury professionals within banks, and how these constraints have modified the traditional approaches to asset and liability management (ALM). It is no longer sufficient to consider balance sheet management just through a normal business environment; extreme and highly stressed environments should also be considered. The tools needed to achieve this are evolving, and will vary by institution, but here we describe the key considerations for the reader in designing the relevant framework.

With the finalisation of Basel III, three new metrics for balance-sheet risk management will be binding:

  • 1.

    the liquidity coverage ratio (LCR) defines a minimum for the liquidity buffer relative to potential outflows in a stress scenario;

  • 2.

    the net stable funding ratio (NSFR) defines a minimum for stable sources of funding to the term funding requirements on the asset side;

  • 3.

    the leverage ratio sets a minimum for capital as a percentage of total balance-sheet size.

These ratios will supplement the already implemented and updated Basel II solvency ratio, which sets a minimum level of

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