The financial crisis laid bare flaws in quantifying and managing risks in the banking system which led to new challenges. Asset liability management (ALM) in particular has become a most vital part in every bank.

In the ALMForum we would like to demonstrate our special focus on and competency in asset liability managment – which to us means bank management with extensive treasury know-how – and thus provide a solid foundation for ALM tasks. Because a carefully designed and implemented ALM is a major success factor for the future of every bank. Not only on the risk and return side, but also against the background of tightened compliance standards. The ALMForum offers concrete solutions which we call "deep diving": this stands for extensive essays and examples on current ALM issues – and how to put these concepts into practice.

We are looking forward to receiving your feedback! Please send your questions and suggestions to Patrick Haas at haas[at]

Topic 21 | ICAAP 2018: Bank management under future stress conditions

The ECB has published its ICAAP consultation guide and urges for implementation: the guide will be finalized in the second half of 2018 and enforced in 2019 already as the basis of the banks’ SREP assessment. Thus, the banks must implement it in 2018.

This also means the consideration of future legal projects within the ICAAP planning and in the stress case analysis. Conclusion: Control in the 99% confidence interval is long history and the Basel 3 maxim „Control under stress“ is replaced by „Control under stress - today and in the future“.

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Topic 20 | Own funds planning under MREL/TLAC

In order to increase security in equity and debt capital planning, the banking sector has been waiting for a long time for concrete implementation proposals for the MREL specifications. As usual, Basel (here with the corresponding TLAC specifications) sets the direction.

In May 2016 the EU Regulation EU 2016/1450 sets the framewor for the Minimum Requirements for Eligible Liabilities (MRELs), yet the MREL ratio – to be fixed invidually per bank – is still missing for most institutions.

In the current edition of the ALM Forum we give an overview of the concept and the dimension of the MREL requirements and analyze the consequences in the equity and debt capital planning for different types of banks.

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Topic 19 | CRR2 - The end of funds in the banking book.

Once the CRR2 regulations are enforced, banks will have to realign their investment in funds completely. Reasons are the new capital adequacy rules for funds (Article 132 CRR2) and the new regulation for the separation of the banking and trading book (Article 104 CRR2). The Regulation follows two principles: individual exposures must be identifiable (Look Through) and investment funds may not replace an outsourced trading book.

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Topic 18 | The EU-Commission’s final specification of the NSFR within the CRR

The EU-Commission published its final proposal for the implementation of the still unaddressed Basel III Net Stable Funding Ratio (NSFR) on 23rd of November 2016. Since credit institutions lack sufficient experience in NSFR-management it is of crucial importance for them to introduce a working mechanism prior to the compulsory deadline. Moreover, in contrast to the LCR the NSFR does not allow last-minute correction measures in order to satisfy the minimum requirements.

Rather the NSFR-Ratio leads to a medium- and long-term restructuring of the balance sheet with a potential impact on the business model. This renders the NSFR a more relevant liquidity requirement from a corporate management perspective than the short-term LCR. Our ALM Forum No. 18 provides an overview of the current European implementation requirements and the respective deviations from the Basel standards.

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Topic 17 | ALM Regulations - Basel III Implementation Status

The compliance with the Basel 3 requirements on equity, liquidity and disclosure, entering into force between 2016 and 2019, will constitute a major challenge for banks. The changing regulatory framework influences strategies for the Asset Liability Management (ALM) both directly and indirectly, which makes it essential to keep an eye on the content and implementation schedule. The aim of our December 2016 issue of the ALM Forum is, therefore, to provide an overview regarding the content and status of implementation.

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Topic 16 | Impacts of IFRS 9 on the accounting of financial instruments (September 2016)

Our ALM Forum provides an overview of the changes together with an example of the impact on profit and losses and concludes with consequences for banks.

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Topic 15 | Standard approach for the quantification of the credit spread risks for the banking book in the ICAAP (June 2016)

Today we are presenting the standard approach for the calculation of the credit spread risk within the ICAAP. It is derived from the BIS standards for the measurements of market risks in the trading book.

Please let us know whether the results of the example porfolio within this paper meet your observations in practise.

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Topic 14 | Consequences of the BIS Standards „Minimum Capital Requirements for Market Risk“ for Asset Liability Management (March 2016)

In January 2016 the BIS published its final standards for the new capital requirements regarding market risk in the trading book.

The new allocation criteria for trading and banking book positions can lead to an increased trading book.Additional pressure arises to book hedging positions under the IFRS Hedge Accounting standards.A new standard approach for measuring Credit Spread Risk, which has the potential to become the standard for Credit Spread Risk measurement.

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Topic 13 | The Organisation of ALM / Total Bank Management (TBM) (December 2015)

When managing the banking book, the committee structure represents the usual form of implementation regarding the organisational structure. An essential decision authority goes along with the committees, which has to be clearly structured.

Considering Asset-Liability-Management and Total Bank Management as individual entities is a crucial point in this discussion, since these terms are usually used synonymously. In an all-encompassing approach these terms depict different target-topics.

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Topic 12 | New EBA Guidelines on the Management of Interest Rate Risk in the Banking Book (June 2015)

In recent years regulatory requirements regarding risk measurement approaches have been tightened in almost all risk categories. Interest rate risks within the banking book, however, remained untouched until now. In order to make interest risk in the banking book more transparent and internationally comparable, EBA has published the “Guidelines on the management of Interest rate risk arising from non-trading activities” in May 2015. The standard introduces new regulations for the interest rate risk in the banking book. All banks in the EU have to implement these Guidelines by 01.01.2016.

A highly interesting topic – especially for banks where the interest gap contribution of the banking book is a substantial part of the net interest income.

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Topic 11 | Fully loaded Equity –the challenge in the total bank management (May 2015)

What does "Fully Loaded" mean in the context of the continually increasing capital requirements for the individual bank? This question has to be clarified by the bank management taking into account all currently known and expected regulations. The task of ALM - the overall bank management – will be to steer the bank consistently with the agreed goal. In the current issue of the ALM Forum we provide a comprehensive overview on the subject "expected capital requirements" as well as arguments for the goals.

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Topic 10 | Final EU - LCR provisions in the finishing straight (December 2014)

The changes in the LCR calibration impose a re-designing of the liquidity strategies in the banks. Our article concretely describes the most important changes in the final LCR regulation.

Especially the calculation of the LCR Ratio has become more complex due to multiple constraints introduced. In our article we show an example of the calculation of the recognised high liquid assets - the current regulation will be introduced in our ALM decision trainings and ALM Update Workshops in spring 2015.

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Topic 9 | Asset encumbrance as a new challenge in ALM (October 2014)

Both the intensified use of collaterals (repos, covered bonds, ECB refinancing, margins with derivatives) as well as the priority ranking of state-guaranteed retail deposits in the new EU resolution regime lead to shrinking volumes of assets available to cover unsecured funds in case of liquidation. Therefore, banks (and the ALM) have to start to actively manage the asset encumbrance. In this article we will present and discuss the different alternatives available for calculating the asset encumbrance of banks.

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Topic 8 | New framework of IFRS 9 (2013) for fair value hedge accounting of interest rate risks (June 2014)

The different valuation methods of banking book positions are resulting in undesired fluctuations of the P&L result. IAS 39 provided a framework (hedge accounting) to deal with and offset these P&L result fluctuations. However, the strict rules for hedge accounting often limited the implementation of appropriate hedging strategies. With the new standard IFRS 9, the points of critics of the industry has been taken into account, trying to make the framework of hedge accounting more practical. Especially, the risk management strategy has become more important and is assigned a key factor in IFRS 9 hedge accounting. The following article tries to gives an overview of the most remarkable changes of IFRS 9 compared to IAS 39.

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Topic 7 | Result measurement of the bond portfolio (credit spread management) (April 2014)

The increasing credit spread volatility as a result of increasing bond portfolios at banks requires the quantification of credit spread risk to avoid undesired effects in the P&L result. For that purpose it is necessary to separate the credit spread risk from the interest risk position of the bond, to recognize term-time valuation results in the P&L in a clean manner and to measure credit spread risk (on a portfolio basis). The article presents methods of credit spread calculation as well as the reconciliation of the credit spread risk result with the P&L result.

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Topic 6 | Methodically clean integration of rollover transactions into (fixed) rate ALM positions (January 2014)

Using different interest rate curves in customer business and ALM/risk management may lead to "management mistakes" as well as adverse effects on the bank result. Another issue are the liquidity costs of the pool banks contained in the EURIBOR/LIBOR rates, which make it impossible to cleanly calculate and manage interest and liquidity risk. The solution is to price the basis swap costs of the individual basis interest curves into the corresponding products and to adopt the EONIA swap curve as interest transfer price. The article deals with these bank management issues and shows a workable solution illustrated with calculation examples.

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Topic 5 | Deriving liquidity costs and their consequences for management (December 2013)

The management of liquidity risk and the necessary allocation of liquidity costs has gained in importance since the financial crisis – not only due to new regulatory requirements, but also from an economic point of view in bank management. Besides the calculation of the stress capital commitment, this requires the transparent derivation of the liquidity curve, allowing ALM to manage liquidity risk and to allocate liquidity costs to their respective causes. The article gives an overview on the requirements, the result-neutral calculation as well as the influencing factors for allocating liquidity costs.

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Topic 4 | Transfer prices for amortizing and annuity paying products and consistent presentation of the ALM and P&L result (September 2013)

Interest and liquidity risk management of the banking book by ALM are especially challenging for non-bullet loans or deposits. Using the simple average of reference rates results in undesired customer margin volatilities, due to constant capital repayment until maturity. This drawback may be avoided by using term weighted tranches/reference rates. The article gives an overview of the two approaches of transfer price calculation including the corresponding advantages and disadvantages. Finally, the impact on the customer business and ALM result is presented.

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Topic 3 | Dynamic management of ALM positions with undefined maturity (June 2013)

In a transfer price system, margin stability in the customer business is crucial. This requires risk positions (interest, liquidity) to be manageable by ALM. Using "dirty" transfer price models for managing positions without contractually defined maturity affecting income, may result in substantial problems in hedging and fluctuations of the bank result.

The article gives an overview of the different options for dynamic management using moving average rates, with a special focus on handling volume increases and decreases. Additionally, the advantages/disadvantages of the different methods are described as well as their influence on the customer margin and interest gap contribution.

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Topic 2 | Deriving the capital commitment for products with undefined maturity (April 2013)

Setting up a "sound" capital commitment balance is a very important issue in a bank's current bank management/ALM and governance/compliance. Based on the capital commitment balance, the bank manages the pricing of the customer business (liquidity costs) and the liquidity in ALM; measures the refinancing risk (necessary liquidity buffer) and calculates the liquidity cost risk (ICAAP). Therefore, the board has to make sure that the method employed is accepted throughout the bank, and also vouch for it in front of the regulator.

How to deal with fixed, clearly defined capital commitments is not the issue at hand. Rather, it is the many products without a (clearly) defined term, with multiple clauses and options, with collaterals and requirements as well as the validation requirements in a normal as well as stress case the treatment of which has to be clarified. Our article outlines the currently available methods for modelling capital commitments which would then have to be adapted to the individual product portfolio of each bank.

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Topic 1 | Deriving the interest commitment for products with undefined interest adjustment and maturity (February 2013)

Products with undefined interest and capital commitment are frequently found in European universal banks’ product portfolios and the margin on these products is a major source of net interest income. Managing these products and the resulting interest risk position depends on a professional method of transfer pricing which is becoming more and more important due to several reasons:

  • Growing competition of banks for saving deposits due to expected regulatory requirements (e.g. LCR/NSFR) and the debt crisis, whereby pricing becomes a major factor of competition
  • Pressure of regulator on banks to sufficiently validate interest and capital commitment assumptions

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