The Handbook of ALM in Banking (2nd Edition)
First published:
ISBN: 9781782723455
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Considerations for ALM in Low and Negative Interest Rate Environments
Thomas Becker, Raphael Bulut and Steve Uschmann
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
Asset and liability management (ALM) includes the management of interest rate risk arising from a bank’s business activities. In cases of very low or even negative interest rates the behaviour of bank risks presents new challenges. Usually, ALM functions are also tasked with stabilising net interest income (NII) banking book business revenues; in an environment of negative yields this objective becomes difficult to achieve. Customers may behave differently, which challenges product modelling assumptions, and certain products reveal inherent optionalities that need to be looked at carefully. This chapter illustrates objectives of ALM functions in banks and its difficulties in low-yield environments with a focus on the impact on interest rate risk management. Liquidity management aspects are left aside. We look at the impacts on modelling of products with behavioural aspects and countermeasures to deal with margin erosion. Finally, we illustrate the different views of regulators and developments in legislation, and discuss their effects on banks’ risk management. The chapter concludes with an analysis of market changes caused by technological and competition changes.
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