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

Part IV

Risk Management for Asset and Liability Managers

The Risk Management Department is usually a key department in banks and insurance companies. In some banks at the beginning of the 90s, the A/L Management Departments used to be parts of the Risk Management Departments. Nowadays, A/L managers have to become competent in risk modelling when developing their strategies.

Risk management has many objectives:

• stopping bad things happening;
• keeping regulators happy;
• risk reporting;
• risk policy and risk appetite definition in connection with the operational teams and sometimes the presentation of risk taking opportunities;
• risk exposure, risk allocation and limit controlling;
• developing risk measurement methodology (including aggregation and diversification effects modelling);
• new products risk analysis.

To ensure all these objectives, the Risk Management Department should be independent from risk taking operational teams.

In this Part, all the main kinds of risk are described:

• financial market risks (interest rate risk, currency risk, liquidity risk, credit risk, etc.);
• business and model risk;
• operational risk
• accounting risk.

For each risk the nature of the risk is illustrated (occasionally through an example) and the impact of this risk on company incomes. Additionally, the indicator to monitor this risk, the way to simulate it and the hedging solutions are presented.

The regulatory constraints are detailed in the appropriate chapter.