Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition

Table of contents

1. Copyright
   1. Dedication
2. Financial Times Prentice Hall
3. About the Authors
4. Acknowledgments
5. Introduction
   1. Objectives
   2. Contents
   3. The learning methods
6. Banking Services and Balance Sheet
   1. Flows of funds in banking
   2. Asset and liability management
7. Value Creation for Shareholders
   1. Shareholders’ investment opportunities
   2. Valuation of bank shares
   3. Managerial rules
8. ROE Breakdown
   1. Return on equity (ROE)
   2. Appendix: ROE breakdown
9. Profit Centre Management
   1. RAROC, EVA, economic profit
10. Profit Allocation and Fund Transfer Pricing for Deposits and Loans
    1. Profitability of deposits and loans: The need for a relevant fund transfer price
    2. The case of deposits
    3. The case of loans
       1. Which maturity?
    4. Ask/bid rate and reserve requirement
    5. Managerial rule
    6. Appendix: Reserve requirement and transfer price
11. The Capital Adequacy Regulation, Basel I
    1. The 8% BIS ratio
       1. History
       2. The capital adequacy regulation
       3. BIS capital
       4. Asset weighting
       5. The market risk amendment
       6. Basel II
    2. Appendix to Stage 6
    3. Weighting system for off-balance sheet items
    4. Derivatives: Forex, interest rate, equity, commodities
       1. Current exposure method
12. Loan Pricing (1): The ‘Equity’ Spread
    1. Break-even loan pricing and the ‘equity’ spread
    2. Economic capital
       1. Economic capital allocation
    3. A new BIS regulation: Basel II
13. The Capital Adequacy Regulation, Basel II
    1. Basel II: The Three Pillars
    2. From the Basel I 8% Cooke ratio to the Basel II capital ratio
       1. The Basel II capital adequacy regulation
       2. Credit risk weighting
       3. The standardized approach
       4. The internal ratings-based (IRB) approach
    3. Operational risk
       1. Standardized approach
       2. Advanced measurement approach (AMA)
    4. Model validation
14. Loan Pricing (2): Credit Risk and Loan-Loss Provisions
    1. Credit risk pricing
    2. Measuring loan-loss provisions: ‘lend now, lose later’
15. Securitization
    1. The securitization process
    2. The economics of securitization
16. Value Creation: A Summary
    1. Value creation
       1. Overall bank level
       2. Profit centre level
       3. Loan management
17. The Control of Interest Rate Risk (1): The Repricing Gaps
    1. Measuring interest rate risk
    2. Bank accounting: Accrual vs. marked-to-market
    3. The repricing bucket (gaps)
       1. Reading the repricing bucket
    4. Reporting risk
       1. Earnings-at-risk in ‘normal’ times
       2. Earnings-at-risk under ‘stress scenarios’
18. The Control of Interest Rate Risk (2): The Simulation Model
    1. Limits to the use of repricing gaps
    2. Simulation model
    3. Garbage in – garbage out
19. Forwards and Financial Futures
    1. Forward contracts
    2. Financial futures
    3. Marking-to-market and margin calls
    4. Payoffs
    5. Hedging repricing gaps with futures
20. The Control of Interest Rate Risk (3): The Economic Value at Risk
    1. Bank solvency and the economic value of equity
    2. Duration
    3. The economic value of equity at risk
    4. Two measures of interest rate risk
21. The Control of Liquidity Risk
    1. Cash flow gap for ‘normal time’
    2. Cash flow for ‘stress scenarios’
22. Options
    1. Forwards and futures
    2. Options
       1. Call option
       2. The put option
    3. Volatility, a new source of risk
23. Credit Derivatives
    1. Credit derivatives
       1. Credit default swaps (CDS)
       2. Total rate of return swaps (TRORS)
       3. Credit-linked notes (CLN)
    2. Synthetic securitization
    3. Single-name credit default swaps vs. CDS index vs. benchmark CDS index
24. The Aggregation of Risks and Risk Diversification
    1. The aggregation of risks, Proposal I
    2. The aggregation of risks, Proposal II
       1. A word of caution
25. Asset and Liability Management: An Art, Not a Science
    1. The control of profit and value creation
       1. Pricing loans
       2. Loan securitization
    2. The control of interest rate risk
    3. The control of liquidity risk
    4. The aggregation of risks
26. Software
    1. How to get started?
    2. Specifications
    3. Online help
    4. Navigation
    5. Printing
27. Answers to Exercises
    1. Solution to Stage Two
    2. Solution to Stage Three
    3. Solution to Stage Four
    4. Solution to Stage Five
    5. Solution to Stage Six
    6. Solution to Stage Seven
    7. Solution to Stage Eight
    8. Solution to Stage Nine
    9. Solution to Stage Ten
    10. Solution to Stage Twelve
    11. Solution to Stage Thirteen
    12. Solution to Stage Fourteen
    13. Solution to Stage Fifteen
    14. Solution to Stage Sixteen
    15. Solution to Stage Seventeen
    16. Solution to Stage Eighteen
    17. Solution to Stage Nineteen
28. Glossary
29. References