Handbook of Asset and Liability Management: From models to optimal return strategies

8

ALM as a Profit Centre

Le bon profit ne se dit pas. (Béroalde de Verville)

FTP is a key part of company management control.

The introduction of FTPs makes possible an essential part of ALM implementation, i.e. transforming the ALM into a profit centre.

Many banks use FTPs to price their products but only the most advanced companies developed an independent ALM as a profit centre. The profit centre is not always the ALM team; it could be the Treasury Department. The most important thing is to separate the Commercial Department income from the financial ALM income. Should the opposite occur, it could be easy for the Commercial Department to point the finger at the ALM if the overall incomes are decreasing (even if the diminution is caused by the marketers). Usually, ALM teams are less powerful than the other big commercial departments and computing an ALM income is a simple way to protect ALM teams. On the contrary, a weak ALM team would not promote the idea of becoming a profit centre.

FTP implementation makes the separation easy and possible. The result of ALM is the difference between the FTP and the financial market conditions according to the accounting scheme of the activity.

Moreover, ALM incomes should be split between the different risks:

8.1 ONE PROFIT CENTRE FOR ONE FINANCIAL RISK

For example, an ALM team should implement those different profit centres:

• interest rate risk profit centre;
• liquidity risk profit centre;
• currency risk profit centre;
• inflation risk profit ...