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The Handbook of ALM in Banking
Second Edition
The Handbook of ALM in Banking
Second Edition
Managing New Challenges for Interest Rates,
Liquidity and the Balance Sheet
Infopro Digital
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this includes efforts to contact each author to ensure the accuracy of their details at
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While best efforts have been intended for the preparation of this book, neither the
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responsibility for any errors, mistakes and or omissions it may provide or for any losses
howsoever arising from or in reliance upon its information, meanings and interpretations by
any parties.
Contents
Introduction
PART I INTRODUCTION
1 Bank Capital and Liquidity
Marc Farag, Damian Harland, Dan Nixon
11 Credit Spreads
Raquel Bujalance, Oliver Burnage
Santander
12 Hedge Accounting
Bernhard Wondrak
TriSolutions GmbH
PART III LIQUIDITY RISK
13 Supervisory Views on Liquidity Regulation, Supervision
and Management
Patrick de Neef
De Nederlandsche Bank
17 Asset Encumbrance
Daniela Migliasso
Intesa Sanpaolo
Index
About the Editors
Wessel Douma started his career with ING in 1998. After having
filled various positions within market risk management in both
Amsterdam and Hong Kong, in 2015 he was appointed head of the
risk and capital integration (RCI) department, which plays the role of
intermediary between the risk and finance domains. The main focus
of RCI is on ING Bank’s capital and balance-sheet planning, setting
and monitoring ING Bank’s risk appetite statements, managing the
Internal Capital Adequacy Assessment Process, performing stress
tests and managing ING’s recovery and resolution plans.
Lennart Gerlagh is senior risk manager for liquidity and capital risk
management within ABN AMRO, responsible for the risk control
framework for liquidity and capital risk and acting as the second line
of defence towards the ALM and treasury departments. This includes
defining risk limits, monitoring risk appetite, stress testing, ILAAP
and advising senior management and the business on liquidity and
capital risk. He joined ABN AMRO in 2006, first working as a credit
risk analyst for the retail bank and later as head of retail credit risk
modelling, before joining the liquidity and capital risk management
department in 2013. Lennart has a Master’s degree in econometrics
from the University of Amsterdam, and also studied at the Delft
University of Technology. Before joining ABN AMRO he worked for
several years as a consultant at ORTEC, a company specialising in
applied mathematics.
Introduction
1
Bank capital, and a bank’s liquidity position, are concepts that are
central to understanding what banks do, the risks they take and how
best those risks should be mitigated both by banks themselves and
by prudential regulators. As the 2007–9 financial crisis powerfully
demonstrated, the instability that can result from banks having
insufficient financial resources – capital or liquidity – can acutely
undermine the vital economic functions they perform.
This chapter is split into three sections. The first section
introduces the traditional business model for banks of taking
deposits and making loans. The second section explains the key
concepts necessary to understand bank capital and liquidity. This is
intended as a primer on these topics: while some references are
made to the 2007–9 financial crisis, the aim is to provide a general
framework for thinking about bank capital and liquidity. For example,
the chapter describes how it can be misleading to think of capital as
“held” or “set aside” by banks; capital is not an asset. Rather, it is a
form of funding: one that can absorb losses that could otherwise
threaten a bank’s solvency. Meanwhile, liquidity problems arise due
to interactions between funding and the asset side of the balance
sheet, when a bank does not hold sufficient cash (or assets that can
easily be converted into cash) to repay depositors and other
creditors. Appendix A explains some of the accounting principles
germane to understanding bank capital.
The final section gives an overview of capital and liquidity
regulation. It is the role of bank prudential regulation to ensure the
safety and soundness of banks, for example, by ensuring that they
have sufficient capital and liquidity resources to avoid a disruption to
the critical services that banks provide to the economy. In April
2013, the Bank of England (“the Bank”), through the Prudential
Regulation Authority (PRA), assumed responsibility for the safety and
soundness of individual firms, which involves the microprudential
regulation of banks’ capital and liquidity positions.1 At the same
time, the Financial Policy Committee (FPC) within the Bank was
given legal powers and responsibilities2 to identify and take actions
to reduce risks to the financial system as a whole (macroprudential
regulation) including by recommending changes in bank capital or
liquidity requirements, or directing such changes in respect of certain
capital requirements. In 2013 the FPC made recommendations on
capital that the PRA have taken steps to implement.3
Capital
As noted above, banks can make use of a number of different
funding sources when financing their business activities.
Capital can be considered as a bank’s “own funds”, rather than
borrowed money such as deposits. A bank’s own funds are items
such as its ordinary share capital and retained earnings, in other
words, not money lent to the bank that has to be repaid. Taken
together, these own funds are equivalent to the difference between
the values of total assets and total liabilities.
While it is common usage to refer to banks “holding” capital, this
can be misleading: unlike items such as loans or government bonds
that banks may actually hold on the asset side of their balance
sheet, capital is simply an alternative source of funding, albeit one
with particular characteristics.
The key characteristic of capital is that it represents a bank’s
ability to absorb losses while it remains a “going concern”. Many of a
bank’s activities are funded from customer deposits and other forms
of borrowing by the bank that it must repay in full. If a bank funds
itself purely from such borrowing, that is, with no capital, then if it
incurred a loss in any period, it would not be able to repay those
from whom it had borrowed. It would be balance-sheet insolvent: its
liabilities would be greater than its assets. But if a bank with capital
makes a loss, it simply suffers a reduction in its capital base. It can
remain balance-sheet solvent.
There are two other important characteristics of capital. First,
unlike a bank’s liabilities, it is perpetual: as long as it continues in
business, the bank is not obligated to repay the original investment
to capital investors. They would only be paid any residue in the
event that the bank is wound up, and all creditors had been repaid.
And second, typically, distributions to capital investors (dividends to
shareholders, for instance) are not obligatory and usually vary over
time, depending on the bank’s profitability. The flip side of these
characteristics is that shareholders can generally expect to receive a
higher return in the long run relative to debt investors.
Author: Anonymous
Language: English
Pharos was an island off the coast of Egypt, near Alexandria. It was famous for its
lighthouse, completed 280 B. C., built of fine white marble. Its light was visible
more than 40 miles. It existed 1600 years. Destroyed by earthquake.
THE TEMPLE OF DIANA.
The Temple of Diana at Ephesus was 220 years in being built, was of imposing
richness, was 425 feet long, 225 feet broad, and supported by 127 columns of the
finest Parian marble, each column 60 feet high and weighing 150 tons—these
columns furnished by 127 Kings.
STATUE OF JUPITER.
The Colossal Statue of Jupiter in the Temple of Olympia at Elis was of gold and
ivory and sat enthroned 800 years, and was destroyed by fire about A. D. 475. An
imitation of the head is preserved in the British Museum.
This statue was 105 feet high, and hollow, with a winding staircase to its head.
After standing 56 years, it was destroyed by an earthquake, 224 years B. C. It lay
for nine centuries on the ground. It is said to have required 900 camels to remove
the metal, hence it must have weighed over 700,000 pounds. It was erected to
express the gratitude of the City of Rhodes to their allies under the King of Egypt
against their enemy, the King of Macedon.
MILLIE CHRISTINA
The Carolina Twin
Born in Columbus Co.,
North Carolina
JULY 11th, 1851.
This structure was erected by Artemisia, who was the sister, wife and successor of
Mausolus, King of Caria, B. C. 353. It was a rectangular building, surrounded by
an Ionic portico of 36 columns, and surmounted by a pyramid rising in 24 steps,
upon the summit of which was a colossal marble quadriga, with a statue of
Mausolus.
These were built by Nebuchadnezzar to gratify his wife, Amytis, a native of Media,
and who longed for something to remind her of her mountain home. They
consisted of an artificial hill 400 feet square at the base, and rising in terraces to a
height which overtopped the walls of the city. These terraces were filled with
luxuriant vegetation of all kinds, even large trees, and were watered by a fountain
at the summit, fed with water drawn from the Euphrates.
Southern California Railway Company. Passenger Department.
H. G. Thompson, Gen’l Pass. Agt.
H. K. Gregory, Ass’t Gen’l Pass. Agt.
Los Angeles, Cal., Jan. 30, 1895.
To Conductors, Los Angeles to Santa Ana, San Bernardino via Orange, San
Bernardino to Redlands, and Redlands to Los Angeles:
It is customary for Millie Christine, the dual woman, to require but one ticket.
Please be governed accordingly when Millie Christine is making a trip over any of
our lines as above indicated.
Yours truly,
H. G. THOMPSON, G. P. A.
M I L L I E C H R I S T I N E,
THE CAROLINA TWIN,
SURNAMED
T h e Tw o - H e a d e d L a d y, t h e D o u b l e -
To n g u e d N i g h t i n g a l e , t h e E i g h t h
Wonder of the World, the Puzzle
of Science, the Despair of
D o c t o r s , t h e D u a l U n i t y.
All of these names has she earned at various times, with the final
title which we claim for her in defiance of any other or others: