Asset Liability Management - Intro

Asset Liability Management

Jawwad Ahmed Farid

ALM at a glance

Value/

Income

Maturities

Interest Rates

Repricing

Funding

Dimensions

Maturity

Liquidity

Funding

ALM

Equity Liabilities Assets

Re-price Liabilities

Re-price Assets

Risk - Return

Metric or Target

Account

Change in Interest Income

Change in Market Value

Driver Change in

Interest Rate

Setting Balance

Sheet Income

Statement

ALM Framework - I

Business Model

Risk Analysis

Financial Model

Liquidity Model

Capital Model

Stress Tests

ALM – Framework - II

Value at Risk

Simulation ALM Portfolio Review

Capital

Building the ALM model

Balance Sheet

P&L Valuation

ALM Reports Interest Rate

Generator Calculation

Engine

Presentation

ALM Cheat Sheet

Sigma

Duration

Convexity

Asset Sensitive

Liability Sensitive

Value at Risk

Hedging Tools

ALM Cheat Sheet

See link above for ALM convention & FAQ’s • R.P Reprice • As Assets • L Liabilities • NII Net Interest Income (PnL) • MVE Market Value of Equity (Value) • EaR Earning at Risk (NII with VaR) • Asset Sensitive • Liability Sensitive

ALM Cheat Sheet

Liquidity Risk & Stress Testing

Name Crisis

Change in market conditions

Operational Loss

Asset related Loss

Regulatory scandal

Accounting Scandal

Liquidity Crisis Name Crisis

Asset and share price under

pressure

Rating Downgrad

e

Counterparty Limits

Withdrawn or

restricted

Margin and

Collateral Calls

Liquidity driven

Asset Sale

Cash Generation • Repurchase agreements

• Discount window

• Outright sale at depressed prices

• Off market settlement for netting off liabilities

Asset Sales

• Secured Term loans

• Equity Injection

• Asset Swap for Cash

• Regulatory driven cash injection or take over

Cash Generation

• Realignment and restructuring of resources

• Discontinued operations

• Limit management

• Centralization of cash management

Cash conservation

Bear Stearns

Under 90 days

Crisis in full bloom 20th December 2007 – Q4 Loss

JP Morgan Takeover 16th

March 2008 @ 2$ a share

Lehman

Under 30 days

Crisis in full bloom 19th August 2008 – Q3 Loss & write

downs

Lehman Bankruptcy Filing

15th Sep 2008

9th June: $45 billion in liquidity, 20% reduction risky assets, leverage from 31:1 to 25:1. Survived March Bear fallout. Raised US$ 10 billion through capital issues in April/June

Jawwad Ahmed Farid

alchemya.com FinanceTrainingCourse.com

jawwad@alchemya.com