Vous êtes sur la page 1sur 28

Liquidity risk, Bank ALM policy and

the Treasury Operating Model

Extracted from The Principles of Banking


John Wiley & Sons Limited
May 2012

Professor Moorad Choudhry


Department of Mathematical Sciences
Brunel University
Agenda
ALCO policy
Treasury operating model
ALCO best practice

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

ALCO management and reporting Formulating ALM strategy


Management reporting
ALCO agenda and minutes
Assessing liquidity, gap and interest-rate risk reports
Scenario planning and analysis
Interest income projection

Asset management Managing bank liquidity book (CDs, Bills)


Managing FRN book
Investing bank capital

ALM strategy Yield curve analysis


Money market trading

Funding and liquidity management Liquidity policy


Managing funding and liquidity risk
Ensuring funding diversification
Managing lending of funds

Risk management Formulating hedging policy


Interest-rate risk exposure management
Implementing hedging policy using cash and derivative instruments

Internal Treasury function Formulating transfer pricing system and level


Funding group entities
Calculating the cost of capital

2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 4
Liquidity Management

The continuous process of raising new funds or investing surplus funds


is known as liquidity management.
It has several objectives; possibly the most important is to ensure that
deficits can be funded under all foreseen circumstances.
In addition there are regulatory requirements that force a bank to
operate certain limits and state that short term assets be excess of
short run liabilities.
Managing the banking books liquidity is a dynamic process, as loans
and deposits are known at any given point, but new business will be
taking place continuously and the profile of the book must be re-
balanced.
There are several factors that influence this dynamic process -

2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 5
Liquidity Management cont

Demand deposits have no stated maturity


There are a number of ways that a bank can choose to deal with these
balances :
To group all outstanding balances into one maturity bucket at a future date
that is the preferred time horizon of the bank, or a date beyond this.
To rely on an assumed rate of amortisation for the balances, say 5% or 10%
each year.
To divide deposits into stable and unstable balances, of which the core
deposits are set as a permanent balance (behaviouralisation that can be
demonstrated to the regulator). Market practice ranges from 2-3 years tenor
to 7-8 years tenor.
To make projections based on observable variables that are correlated with
the outstanding balances of deposits.

2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 6
Treasury organistion structure

There is no one right Treasury operating model


The first decision to consider is whether Treasury is a front-office
function or a middle-office function
See next slides for scope of the function
and the ones after that for alternative approaches!

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

Counterparty risk 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

Counterparty risk management

Investor Relations

Finance and Risk Management

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

Counterparty risk management

Investor Relations

Finance and Risk Management


Regulatory reporting

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

Counterparty risk management

Investor Relations

Finance and Risk Management


Regulatory reporting

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

Counterparty risk management

Investor Relations

Finance and Risk Management


Regulatory reporting

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
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 13
Infrastructure & Scope

Structure of Treasury Function


Global Treasury Management
Risk mitigation, allocation and control
Local and Group-level risk control
Reporting, control, analysis, risk allocation, general support & advisory
Bank Group Operating Treasuries
Risk consumption Money markets, FX trading, Capital markets
The centrally controlled Treasury teams - Arab Bank plc branches and majority-owned subsidiaries
Similar operating models
Country Treasurers directed by Global Treasurer in partnership with local ALCOs
Vertical, functional reporting lines
Mandated to meet local business and regulatory requirements
and also to collaborate in order to meet Group needs

Segregation of Duties multiple levels of control


Front office, managed by Group Treasurer
Middle office, managed by CFO
Back office, managed by COO
CRO, responsible for determining risk appetite
Internal Audit, reporting to CEO/Chairman
14
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 14
Infrastructure & ScopeGroup Treasury
Level of Control & Influence over Country Treasuries

Branches Subsidiaries

Organised into geographical regions For 100%-owned subsidiaries


Each region has a Regional Dotted reporting lines from
Treasurer Treasurers
Solid reporting lines from Treasurers
Global Treasurer has
Global Treasurer has Non-executive role?
Direct executive control over Influence, advisory, advocacy
activities only?
Full P&L ownership No P&L ownership

15
2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 15
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

Regional Treasurer and Country


Treasurer position is a dual role Roles combined in
in certain regions certain countries

Capital Markets trading is subject


Country
to appropriate limits and dealing Treasurer
mandates, controlled by Global
Treasury Management
Where staff levels do not support
specialisation, Treasury staff my
have responsibility for any
combination of Treasury Sales, Money Foreign Treasury Capital
Markets Exchange Sales Markets
Capital Markets, Money Markets
and FX roles

2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 16
Tactical & Strategic Initiatives at GT level

Consolidate liquidity gains, and optimise deployment of liquidity


Model and prepare for threats to liquidity
Connect better with external customers with more cross-selling
Earn income by extending risk profile Esp. FX
Invest in building Banks new system and process architecture, to
facilitate FSA-style new regulatory reporting
Mobility of liquidity and other assets

2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 17
Tactical & Strategic Initiatives at GT level

Re-set local & Group-wide liquidity limits


Re-draft and execute Treasury Policy Manual
Improve information sharing between Treasury customer-facing SBUs
Model and prepare for regulatory changes which might affect the Groups
business model
Model and prepare for market changes which might affect Groups liquidity
Build income-generating capacity by advocating greater risk consumption in FX
trading
Increase income with better use of cash
Complete design template for Bank-wide cash, market risk and Treasury
processes

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

2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 19
ALCO best practice
ALCO best-practice

UK FSA guidelines for the structure, ToR and process of ALCO


Proactively controls the business in line with firms objectives; focuses on
entire balance sheet
Ensures risks remain within risk appetite
Considers impact on earnings volatility of changing economic and market
conditions
Ensures an appropriate funds transfer pricing mechanism that aligns to the
firms strategic objectives and risk appetite, and regularly reviews this
mechanism
Acts as the arbitrator in the debate and challenge process between
business lines
Attended by CEO, chaired by CFO, includes Head of Treasury, all business
group heads, chief economist and Head of Internal Audit

2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 21
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

2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 22
The ALCO pack: guidelines

Make it succinct and as accessible as possible


Relegate detailed MI to an Appendix and just have key indicators and
summaries at front
Compare packs and agendas. Get chummy with Treasury counterparts
and look at their banks packs (and show them yours)
Include market data in summary fashionsee examples overleaf

2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 23
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.

Significant spike in 3-mo TED spread reflects increased USD


funding pressures, the spread at end August was 32 bps and the
highest observed since September. USD, EUR and GBP OIS-Libor spread
USD funding levels have not abated. TED since risen to 39 bps
90 GBP
as at 6 October. 80 EUR
OIS spreads to 3-month spreads have blown out to 12-month 70 USD
highs, markedly so for USD, indicating renewed USD funding 60
50
pressure in the interbank market, to match already widened EUR
40
EONIA-Euribor spreads which have widened significantly. 30
20
10
0
Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct-
10 10 10 10 11 11 11 11 11 11 11 11 11 11

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.

2008, 2010, 2012 Moorad Choudhry Liquidity Risk Management Feb 2013 26
Discussion point

Do we agree with foregoing?


The ALCO pack exam question:
Does it provide senior and exec management with information necessary to
run the bank?
Does it help ExCo to do its job?

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