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Please read and note the DISCLAIMER stated at the end of the presentation.
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 2
ALCO policy
The Asset-Liability Committee (ALCO) is responsible for setting, and
implementing, the ALM policy. Its composition varies in different banks but usually
includes heads of business lines as well as director-level staff such as the Finance
Director. The ALCO also sets hedging policy.
The ALM process may be undertaken by the Treasury desk, ALM desk or other
dedicated function within the bank. In traditional commercial banks it will be
responsible for management reporting to the asset-liability management
committee (ALCO). The ALCO will consider the report in detail at regular
meetings, usually weekly.
Main points of interest in the ALCO report include funding structure, variations in
interest income, the areas that experienced fluctuations in income and what the
latest short-term income projections are. The ALM report will link these strands
across the group entity and also to each individual business line. That is, it will
consider macro-level factors driving variations in interest income as well as
specific desk-level factors. The former includes changes in the shape and level of
the yield curve, while the latter will include new business, customer behaviour etc
Of necessity the ALM report is a detailed, large document.
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 3
ALCO policymain mission: strategic overview
Mission Components
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Liquidity Management
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 5
Liquidity Management cont
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 6
Treasury organistion structure
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 7
Capital and balance sheet Liquidity Net Interest Income / NIM
STRATEGIC MANAGEMENT Capital management Liquidity risk management Banking book interest rate risk
Risk limits (RWA) Liquidity limits Interest rate risk management
Cost of capital Liquidity stress tests Interest rate risk modelling
Budget forecasting Liquidity policy Forecasting NII/NIM
ICAAP ILAA
Setting capital policy Contingency funding plan
Setting return metrics LAB policy
Defining capital structure and ratios Liquidity cost calculation
Capital allocation Funding strategy
Internal funds pricing policy (FTP)
MARKET FACING FUNCTIONS Term Liabilities Issuance Money Markets Desk Swaps and Derivatives desks
Senior unsecured debt Cash management Banking book
Subordinated debt Money markets Trading book
Equity instruments -- depos Market risk hedging
Securitisation -- CD/CP
Secured -- FX
Repo
-- ABS/MBS
-- Covered bonds Collateral management
Investor Relations
Rating Agencies
Investors
GOVERNANCE Finance and Risk Management
Financial control and reporting
Regulatory reporting
Liquidity Risk Management Feb 2013 8
2008, 2010, 2012 Moorad Choudhry
Risk and product control
Front-office Treasury op model
Capital management Liquidity risk management Banking book interest rate risk
Term Liabilities Issuance Money Markets Desk Swaps and Derivatives desks
Collateral management
Investor Relations
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 9
Middle office Treasury op model
Capital management Liquidity risk management Banking book interest rate risk
Term Liabilities Issuance Money Markets Desk Swaps and Derivatives desks
Collateral management
Investor Relations
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 10
Treasury op model with market facing function
Capital management Liquidity risk management Banking book interest rate risk
Term Liabilities Issuance Money Markets Desk Swaps and Derivatives desks
Collateral management
Investor Relations
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 11
Treasury op model with market facing and governance
functions
Capital management Liquidity risk management Banking book interest rate risk
Term Liabilities Issuance Money Markets Desk Swaps and Derivatives desks
Collateral management
Investor Relations
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 12
Treasury Infrastructure & Scope
Treasurers (or Group Treasurers) Dual Mandate
1. Mandated by the Chairman and CEO, and ALCO
Manage and control market & liquidity risk
Manage the activity & scope of local Treasuries
Draft and own liquidity and funding policies (Governance and Policy function)
Funds Transfer Pricing policy (clearing centre is Money Markets desk)
2. (Front office Treasury) Mandated by the Chairman and CEO to generate earnings
Money market trading
FX trading revenue
Portfolio management
NII & gains from capital markets trading & holdings
Funds Transfer Pricing Treasury is the cash market place
13
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Infrastructure & Scope
Branches Subsidiaries
15
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Country Treasury Org Model
Regional Treasurers have a Global Treasurer
direct reporting line to the Global
Treasurer
Country Treasurers for controlled
subsidiaries have a dotted
reporting line to the Global Regional
Treasurer Treasurer
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Tactical & Strategic Initiatives at GT level
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 17
Tactical & Strategic Initiatives at GT level
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 18
Tactical & Strategic Initiatives at GT level
Themes
Continue and dual-mandated function Risk Control and Risk Consumption
Design and implement group-wide funding strategy
Mobility of Liquidity and Assets
Globally standardised processes with globally standardised systems
Boost operational effectiveness with smart use of technology
Realising operational synergies
Reduce duplication in support functions
Improved understanding of FX and IR risk characteristics of the business
Full-service connection with Corporate Banking, Investment Banking, Project Finance/Trade
Finance, Private Banking and Retail customers
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ALCO best practice
ALCO best-practice
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ALCO best-practice guidelines
Focuses on effects of future plans / strategy at bank and business line level
Takes decisions to manage ALM risks or escalates issues to ExCo, rather
than simply observing the risks
Ensures issues are fully articulated and debated
Considers recommendations from a tactical sub-committee that excludes
the CEO and other ExCo members
AND
Engages in active dialogue amongst various members
Displays strong degree of challenge
Minutes give insight into the discussions and extent of challenge, and do not
only list action points
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The ALCO pack: guidelines
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Executive Summary
Market Update
Eurozone Sovereign CDS spreads remain stressed ahead of
expected Greek default. Market reaction has now pushed Greek
CDS in excess of 6,000 bps.
Other southern Eurozone Sovereigns expected to trade higher
next month.
Moodys downgraded Italy downgraded 3 levels from Aa2 to A2.
This follows S&Ps downgrade in September. Italy remains on
negative watch.
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 24
Market Update (continued)
The market-implied cost-of-funds shows an equalised true TLP
for the specified peer group.
Applying the banks Svensson (94) non-parametric construction
Asset Swap over 6 months Euribor of large
methodology to our peer group enables us to make a direct Investment Banks
comparison
Bank funding level is significantly in excess of the named
peers, a reflection of the banks market position
For ASW levels, EUR and USD secondary market funding
levels peer group comparison show Bank significantly above
peers.
Funding Update
Market conditions remain stressed with shortening tenors on
wholesale funding and associated pressure on liquidity metrics. Asset Swap over 3 months USD of large Investment
Banks
Unsecured funding mitigating actions have resulted in 13bn
reduction in unsecured funding usage being achieved through
better asset utilisation and asset sales.
Work underway to identify potential to further reduce unsecured
funding usage.
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 25
Liquidity Position
Money Markets desk weighted-average maturity (WAM) has shortened during the quarter, from 71 days in Q2 to 49
days in Q3
Due to shortening tenors, the ILAA stressed outflows have increased to 38.3mln since June, approaching the
internal limit of 40 mln
Improved asset utilisation has led to a higher level of secured funding and a resulting increase in repo stressed
outflow limits (it may be necessary to revise these limits).
The FSA 3 month metric showed Green status (< 10mln excess) during September.
Capital Position
Widening CDS spreads and increasing FX and IR volatility will drive increased Capital requirements over
forthcoming months through modelled counterparty and market risk changes.
Given current undershoot versus capital targets, no immediate business actions proposed as impact is expected
to be within capacity.
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Discussion point
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 27
DISCLAIMER
The material in this presentation is based on information that we consider reliable, but we do not
warrant that it is accurate or complete, and it should not be relied on as such. Opinions expressed
are current opinions only. We are not soliciting any action based upon this material. Neither the
author, his employers, any operating arm of his employers nor any affiliated body can be held liable
or responsible for any outcomes resulting from actions arising as a result of delivering this
presentation. This presentation does not constitute investment advice nor should it be considered
as such.
The views expressed in this presentation represent those of Moorad Choudhry in his individual
private capacity and should not be taken to be the views of his employer or any affiliated body,
including Brunel University or YieldCurve.com, or of Moorad Choudhry as an employee of any
employer or affiliated body. Either he or his employers may or may not hold, or have recently held,
a position in any security identified in this document.
This presentation is Moorad Choudhry 2008, 2012. No part of this presentation may be
copied, reproduced, distributed or stored in any form including electronically without express
written permission in advance from the author.
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 28