An Introduction to Banking: Liquidity Risk and Asset-Liability Management
Dan Cunningham, Senior Euro Cash & OBS Dealer, KBC Bank NV, London
"Focused and succinct review of the key issues in bank risk
Graeme Wolvaardt, Head of Market Risk Control, Europe Arab Bank plc, London
The importance of banks to the world's economic system cannot be overstated. The foundation of consistently successful banking practice remains efficient asset-liability management and liquidity risk management.
This book introduces the key concepts of banking, concentrating on the application of robust risk management principles from a practitioner viewpoint, and how to incorporate these principles into bank strategy.
Detailed coverage includes:
- Bank strategy and capital
- Understanding the yield curve
- Principles of asset-liability management
- Effective liquidity risk management
- The role of the bank ALM committee
Written in the author's trademark accessible style, this book is a succinct and focused analysis of the core principles of good banking practice.
About the author.
1 BANK BUSINESS AND CAPITAL.
Fees and commissions.
Scope of banking activities.
Banking and trading books.
Financial statements and ratios.
The balance sheet.
Profit and loss report.
2 THE MONEY MARKETS.
Securities quoted on a yield basis.
Money market deposits.
Certificates of deposit.
Securities quoted on a discount basis.
Eligible banker's acceptance.
Commercial paper programmes.
Commercial paper yields.
Asset-backed commercial paper.
The classic repo.
Examples of classic repo.
Examples of sell/buyback.
Currencies using money market year base of 365 days.
3 THE YIELD CURVE.
Importance of the yield curve.
Using the yield curve.
Yield-to-maturity yield curve.
Analysing and interpreting the yield curve.
Theories of the yield curve.
The zero-coupon yield curve.
Example calculation illustrations.
Forward rate calculation for money market term.
Understanding forward rates.
4 INTRODUCTION TO TRADING AND HEDGING.
The yield curve and interest rate expectations.
Credit intermediation by the repo desk.
Matched book trading.
Interest rate futures.
Forward rate agreements.
Overnight interest rate swaps.
Credit risk hedging.
Understanding credit risk.
Credit rating rationale.
Credit limit setting and rationale.
Loan origination process standards.
5 ASSET AND LIABILITY MANAGEMENT I.
The liquidity ratio.
The liquidity portfolio.
6 ASSET AND LIABILITY MANAGEMENT II.
Interest rate risk and source.
The banking book.
The ALM desk.
Developments in ALM.
Liquidity and interest rate risk.
The liquidity gap.
Gap risk and limits.
Interest rate gap.
Portfolio-modified duration gap.
Critique of the traditional approach.
The cost of funding.
The securitization process.
Benefits of securitization.
Generic ALM policy for different-sized banks.
NPV and value-at-risk.
7 ASSET AND LIABILITY MANAGEMENT III: THE ALCO.
8 BANK LIQUIDITY RISK MANAGEMENT.
The liquidity policy statement.
Principles of bank liquidity risk management.
Measuring bank liquidity risk: key metrics.
Internal funding rate policy.
9 A SUSTAINABLE BANK BUSINESS MODEL: CAPITAL, LIQUIDITY AND LEVERAGE.
The new bank business model.
Liquidity risk management.
The liquid asset buffer.
Conclusions and recommendations.
10 BANK REGULATORY CAPITAL.
Banking regulatory capital requirements.
Capital adequacy requirements.
A primer on Basel II.
Impact on specific sectors.
Appendix A Summary of bank product line.
Appendix B Financial markets arithmetic.
Appendix C List of abbreviations and acronyms.
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