Strategic Balance Sheet Management: Mastering ALM, IRRBB, and Liquidity Risk
COURSE OBJECTIVE
Course to improve investment and financing decisionmaking in financial institutions as well as to measure and manage the structural risks of the balance sheet, such as interest rate risk, exchange rate risk and liquidity. The COVID19 crisis will force entities to rethink strategies in the short and medium term, to review contingency plans, to optimize cash positions, to create new deposit models with defined maturities and, if possible, to monitor in real time. deposits, credit lines and collaterals.
Another big challenge for the banks' ALM department is the implementation of the Libor transition and the complex creation of the yield curve to value interest rate derivative positions and asset and liability positions. Therefore, the course addresses the following points:

Address good practices to mitigate and measure the impact of COVID19 on ALM.

Show the most recent methodologies, strategies and techniques to manage and quantify the structural risks of a bank's Balance Sheet.

The recent Basel IV standard approach guidelines for measuring interest rate risk in the banking book (IRRBB) and the requirements for an internal model have been included.

Explanation of the impact and implementation of the Libor transition.

Tools to create the yield curve with the new reference rates, SOFR in the US and €STER in the EU.

Methodologies to measure interest risk are explained, and mitigate it through micro and macro hedges with futures and options.

Methodologies to estimate the Economic Value EVE, NII, NIM and EAR are shown. Best practices for implementing both a dynamic repricing GAP and a cap system are explained.

The Structural VAR of the exchange rate and variable income in the field of the banking book is explained.

Models of prepayment behavior, indefinite maturity deposits and withdrawals of lines of credit are taught under the new postCOVID19 normality.

Liquidity risk management and measurement methodologies are exposed. In addition, Basel III regulatory requirements on liquidity and leverage are included.

The optimization of balance sheet positions under postCOVID19 scenarios is explained in detail.

The main FTP and LFTP price transfer systems are explained in detail.

The integration of ICAAP and ILAAP is explained.

Stress testing models of interest risk and liquidity risk are shown.
WHO SHOULD ATTEND?
The Course is aimed at ALM professionals, CFOs, Risk managers, Treasurers, analysts, pension fund managers, auditors, controllers, regulators and compliance staff.
Price: 7.900 €
Schedules:

Europe: MonFri, CEST 1620 h

America: MonFri, CDT 1821 h

Asia: MonFri, IST 1821 h
Summer Price: 5.900 €
Jun 1  31 Aug
Level: Advanced
Duration: 30 h
Material:
Presentations PDF
Exercises in R, Python, SAS and Excel
AGENDA
Strategic Balance Sheet Management:
Mastering ALM, IRRBB, and Liquidity Risk
LIBOR TRANSITION
Module 1: Transition from LIBOR to Reference Replacement Rates

The disappearance of Libor / Ibor

Libor manipulation

RFRs, or riskfree ratios

Existing Libor Indices and Proposed Alternative Indices

Europe

ESTER (‘Euro shortterm rate’)

Hybrid Euribor


USA

SOFR (‘Secured overnight financing rate’)

Effective Federal Funding Rate



Spread between EONIA and ESTER

transition phases

financial impacts

ISDA protocol

Changes in risk factors: yield curve and volatility

OTC derivatives pricing

CCP Trades

Impact on xVAs

FVA analysis


Impact of financial instruments

Impact on interest rate derivatives: caps, floors and swaptions

New calibration models

Management of possible interest rate, market and counterparty risks

Impact on IFRS 9: hedging accounting

Volatility in the income statement

Impact of COVID19 on the Libor transition
INTEREST RATE RISK IN BANKING BOOK (IRRBB) BASEL IV
Module 2: Interest rate risk in the Banking Book in Basel IV

Definition of IRRBB

Risk subtypes:

Gap Risk

Basis Risk

Option Risk


Credit Spread Risk in the Banking Book

Economic Value and incomebased measures

IRRBB principles

Principles for banks

Expectations

Risk management methodology

Delegation

limits policy

Definition of Economic Value, dynamic vision

Interest rate shocks and stress scenarios.

behavior models

prepaid

Deposits without defined expiration

Measurement systems

data integrity

Governance model


Principles for Supervisors

Assessment

Resources

supervisory cooperation


Scope and timeline

Implementation

IRRBB Standard Approach

Standard approach methodology

Components

Cash Flow Bucketing

Process for positions that are amenable to standardization

Treatment of deposits without defined maturity

Categories

Separation

Caps on core deposits


Treatment of positions with optionalities

Fixed rate loans subject to prepayment

Term deposits with redemption risk

Addon for automatic interest rate options

Standardized EVE risk measure

Interest rate risks for banking book (IRRBB) supervisory outlier tests SOT

Exercise 1: Interest rate risk measurement exercise

Cash flow bucketing

Treatment of deposits without defined maturity

Treatment of optionalities, prepaid.

EVE standardized

Comparison of standardized EVE against IRRBB internal model of economic value

Review Supervisory outlier test SOT

Module 3: Yield Curve LiborOIS and EONIAEuribor

ETTI construction

Available instruments

Bonuses and Deposits

FRAs

Interest Rate Swap

Basis Swap

Cross Currency Swap


Using multiple instruments

ETTI in practice and main Issues

collateralized curve

Overnight Index Swaps (OIS)/EONIA


Bootstrapping approach in ETTI

Euribor curve

Eonia curve


Focus Interpolation

Cubic Splines

Basis Splines


Nelson Siegel Model Approach

Calibration


Stochastic modeling

Vacicek's model

Cox–Ingersoll–Ross model

Ornstein–Uhlenbeck model

HullWhite model


Libor Market Model

Martingales and Numerary

Calibration of caps and swaptions

Multicurve Models

SABR models for negative rates

Exercise 2: Construction of Euribor and Eonia Interest Rate Term Structure Curve in Python

Exercise 3: Construction of the interest rate Term Structure Curve. Case study with deposits, FRAs and Interest Rates Swaps

Exercise 4: Real Case Bank of Spain Nelson Siegel exercise in R and Excel

Exercise 5: Temporary structure of cubic splines and basis splines in Excel

Exercise 6: SABR simulation for negative rates in Python and Excel

Exercise 7: Calibration and simulation CIR and Vasicek in R

Exercise 8: OrnsteinUhlenbeck calibration in R

Exercise 9: HullWhite Simulation in Python
Module 4: SOFR / €STER Yield Curve

Dual Bootsrapping

Multi yield curve

Calibration and optimization

New instruments for SOFR USD

Libor vs. ARR Rates

New risks to manage

Singular calibration curve

Global Calibration Interpolation

Optimization Model

Multidimensional NewtonRaphson solver

Using Jacobians for recalibration

Selection of instruments for calibration ARR Instruments

Yield Curve Calibration Steps

Requirements to achieve a proper calibration

Exercise 10: Multicurve estimation and optimization with Jacobian matrices in Python

Exercise 11: Optimization with Jacobians using the Multidimensional NewtonRaphson solver

Exercise 12: Singular curve estimation

Exercise 14: Multicurve estimation with Jacobian matrices

Exercise 15: SOFR curve estimation
Module 5: Duration and Convexity

Macaulay duration in bonds

Modified Duration

Convexity

Duration and Modified Duration

Portfolio duration and convexity

Duration of Own Resources

Portfolio immunization

negative convexity

Convertible Bonds

Exercise 16: Duration estimation and convexity effect in Excel

Exercise 17: Immunization in Excel bond portfolio

Exercise 18: Negative convexity and valuation by convertible bond decision trees in Excel and VBA
Module 6: EVE and EAR calculation

Yield Curve Stress test

Basis Risk Stress Test

Principal Components (PCA)

Monte Carlo simulation

Simulation of stochastic models: CIR, Vacicek, HJM, etc.

repricing gap

Financial Margin Simulation (EaR)

Capital at Risk Methodology

Measuring the Economic Value of PR (EVE)

Economic value and capital under the ICAAP

Gap analysis limits

Sensitivity limits of the NII and the equity value

Exercise 19: Repricing Gap in R

Exercise 20: Estimation of the EVE and EAR adjusted to the Basel III IRRBB criteria

Exercise 21: EVE estimation using yield curve stress, basis risk stress and Client behavior
Module 7: VaR of interest rate risk

Criteria for the use of VaR

VaR of interest rate risk

Expected Shortfall

delta greek

DeltaGamma VaR

volatility smiles

volatility surfaces

Monte Carlo simulation

Treatment of optionality

Exercise 22: Smile of volatility and volatility surface in R

Exercise 23: Estimation of VaR using Monte Carlo simulation with valuation of optionalities in R
Module 8: Interest rate derivatives and hedges

Interest rate derivatives

Microhedges per operation

NII and Gaps macrohedges

Futures and Swaps

Forward Rate Agreements (FRAs)

Hedging Strategies with Interest Rate Futures

Interest Rate Swaps (IRS)

Overnight Index Swaps (OIS)

Riskfree rate vs OIS

OIS zero curve

OIS vs Libor

Funding risk

CVA and DVA


Interest rate options

Bond Options

Caplets/Caps

Floorlets/Floors

swaptions

Necklace

reverse necklace


Options and Futures on interest rate on SOFR

SOFR Options

SOFR Swaps

SOFR Futures

SOFR Trading Resources


Valuation models

Pricing caps and floors using Black`s Model

Pricing with trinomial trees

Pricing of Caps and Floors using the Libor Market Model

Deep Learning to calibrate and value derivatives


Exercise 24: Swaption Pricing in Python

Exercise 25: Pricing of caps and floors Black`s model in Excel and Python

Exercise 26: Swaption Pricing with Deep Learning

Exercise 27: Caplet and Swaption Libor Market Model in Python

Exercise 28: Calibration One Factor Hull White Swaption Model with deep learning
Module 9: Measurement of the VaR Credit Spread

Credit Spread Risk in the Banking Book

Credit Spread Risk in the Trading Book

PV01 estimation and correlation matrix

Parametric Credit Spread VaR

VaR by Monte Carlo Simulation

Copulate tStudent

Multivariate tstudent distribution

Exercise 29: Estimation of the Spread VaR of a bond portfolio with Monte Carlo Simulation assuming normal multivariate distribution, multivariate tstudent and copula tstudent
BEHAVIOR MODELS
Module 10: Modeling of liabilities without defined maturity

Stable and unstable deposits

Non Maturity Deposits (NMD) in Basel IV

Statistical models of liabilities

Tranches due to deposit volatility

Portfolio Replication model and optimization

OptionAdjusted Spread Model

Expert model to define stable deposits

Cash Flow estimation in the financial margin and economic value

Econometric and machine learning model of deposits

Logistic Regression with behavioral information

SVC

neural networks

Lifetime of deposit accounts


Modeling using stochastic interest rate and Credit Spread

Projection model with RNN and CNN neural networks

Exercise 30: Econometric model and simulation of liabilities without maturity in Excel

Exercise 31: Tranches of stable and unstable deposits in Excel

Exercise 32: Behavior model with logistic regression, neural networks, and SVC in R

Exercise 33: Replicated portfolio approach in Excel

Exercise 34: Advanced econometric NMD model with cointegration tests and portfolio replica methodology in R

Exercise 35: Projection model with RNN and CNN neural networks
Module 11: Prepayment Modeling

Empirical models

Statistical models of prepayment probability

Machine learning models to estimate prepaid rate

Recurrent Neural Networks

SVC

SVR

Feedforward neural network


Probability of payment by contract and by credit pool

Prepaid Option Models

Rational Prepaid Models

Factors such as interest rate, seasonality, economic cycle, Burnout factor and trend

Study of partial and total prepayments in mortgages

Exercise 36: Prepayment exercise in the mortgage portfolio using neural networks and SVR

Exercise 37: Econometric and machine learning model of probability of prepayment in R
Module 12: Models for the Use of Credit Lines

Estimation of the CCF in the EAD

Intensive models of credit line utilization

Management of credit lines

Marginal distribution of the use of lines of credit

Machine Learning models to model the use of credit lines

SVC

Neural networks


Exercise 38: Credit line utilization model in R

Exercise 39: Credit line utilization model with neural networks in Python
LIQUIDITY RISK
Module 14: Measurement of Liquidity Risk

Liquidity Ratios

Basel III LCR and NSFR Liquidity Ratios

Liquidity Coverage Ratio

Level 1 and 2 Liquid Assets

High Quality Liquidity Assets (HQLAs)

Net cash outflows

Net Stable Funding Ratio

Bank planning under Basel III

Stochastic optimization model

Sources of liquidity risk

Main sources of liquidity risk:

Intragroup liquidity risk

Liquidity risk Offbalance sheet

wholesale funding risk

retail funding risk

Funding cost risk

Intraday liquidity risk

Crosscurrency liquidity risk

Asset Risk

Funding concentration risk

Correlation risk

Contagion risk
Module 15: Liquidity Risk Measurement II

Funding Liquidity Risk

Liquidity measurement

Stock Based Approach

Cash Flow based Approach

Hybrid Approach


Cash Flow at Risk

Advanced Cash Flow Projection

Liquidity Temporary Structure

Counterbalancing Capacity

Dynamic Liquidity Gap

Options in the Dynamic Gap

Contractual and behavioral inputs and outputs


Design of contingency fund plans

Strategies for Plan Implementation


Strategies for managing liquidity reserves

Liquidity buffer

Asset Allocation

Asset management based on liquidity measures

Liquidity buffer size estimation

fund strategies

Credit risk management


Introduction to Stress Testing in Liquidity Risk

Historical Approach

Statistical Approach

Expert Approach

Scenario Analysis


Determination of Liquidity Risk Scenarios

Steps to Develop a Contingency Funding Plan

Intraday Liquidity Risk Management

Exercise 40: Global exercise of liquidity and interest rate risk using Dynamic GAP, Basel III liquidity ratios, key liquidity metrics, simulation of Financial Margin and Economic Value through IRRBB in Excel
Module 16: ILAAP Liquidity SelfAssessment

Supervisory Review and Evaluation Process (SREP) EU

Liquidity risk assessment

Assessment of liquidity needs in the short and medium term

Intraday liquidity risk assessment

Evaluation of the liquidity buffer and counterweight capacity

Supervisory liquidity stress testing


Funding risk assessment

Evaluation of the funding profile

Funding profile stability risk assessment

Market Access Assessment

Assessment of expected changes in funding risks based on the entity's funding plan


Internal Liquidity Adequacy Assessment Processes (ILAAP)

Common information between ILAAP and ICAAP

Inherent liquidity risk

Inherent Funding Risk

Governance and liquidity risk management

Stress testing

Contingency Funding Plan


Analysis and metrics of liquidity risk and funding risk

Maturity ladder

concentration of funds

fund prices

fund rollover

Scope and frequency


Exercise 41: Fund rollover analysis in Excel
FUND TRANSFER PRICING (FTP)
Module 17: Funds Transfer Pricing FTP and LFTP

Funds Transfer Pricing FTP

Libor transition impact on FTPs

Transfer Pricing System

Transfer pricing methodologies

Multiple Pool TP

Income Statement and Financial Margin Pool

Matched Maturity FTP

FTP Curve Estimation

Liquidity cost estimation

Matched Maturity TP on Liabilities

Impact of Basel III on FTP

FTP for loans

FTP for deposits

FTP for contingent liquidity risk

Bottoms Curve Setup

Specific Curves Segment

Consideration of large Clients

Curves Flats


Consideration of interest rate strategy and liquidity risk

Liquidity Risk Pricing

Liquidity Funds Transfer Pricing LFTP

LFTP Regulatory Requirements

LFTP Requirements

Exercise 42: Transfer Prices and ordinary pool margin estimation in Excel.

Exercise 43: Transfer Pricing Matched Maturity Approach

Exercise 44: LFTP conditioned to Basel III liquidity risk
STRESS TESTING
Module 18: Reverse Liquidity Stress Testing

Introduction of Reverse Stress Testing

Funding Liquidity Risk

Stress testing of Funding Liquidity Risk

Cost of funds in times of crisis and normal

Identification of risk factors in funds

Funding Risk Score

Assignment of critical values

Calculation of survival periods

Control panel

Impact of funding risk on the bank
Module 19: Stress Testing of Liquidity Risk

Stress Testing Requirements for ILAAP

Consistency between Risk Appetite and Stress Testing the ILAAP

Adverse scenarios that produce a shock to liquidity risk

Liquidity actions

Magnitude of outflows from deposit accounts

Factors Related to Liquidity Stress

Deposits

Commitments

Guaranteed financing

Wholesale financing

Intraday liquidity

Counterweight capacity

Securities lending


Stress testing methodologies in liquidity risk

Bottomup approach

TopDown Approach

hybrid approach

Assessment of the methodologies


Stage design

Benchmark Liquidity Stress Scenarios

Modeling of Haircuts and Addons

Magnitude RunOff Rates

Link of liquidity and solvency


Modeling and Stress Tresting of the RunOff with econometric models

Stress Testing in Contractual Cash Flows

Stress Testing in behavioral cash flows

Global Exercise 45: Stress Testing of liquidity risk in financial statements, simulation of macroeconomic scenarios, impact on behavioral and contractual flows and Runoff rates in SAS and R
Module 20: Stress Testing of Interest Rate Risk

Scenarios and Stress Testing in the IRRBB

Interest Rate Parameter Shock Methodology

NII after the Interest Rate Shock

Stress testing yield curve

Interest rate and currency scenarios for internal management

Interest rate scenarios for stress testing

IRRBB Stress testing program

Governance Stress Testing

Stress testing in behavior models and economic environment

Exercise 46: Monte Carlo simulation, macroeconomic scenarios, impact on EVE and financial margin adverse yield curve scenarios and adverse macroeconomic changes
LIQUIDITY RISK APPETITE
Module 21: Risk Appetite in liquidity risk and IRRBB

Risk Appetite in the ICAAP and ILAAP

Stress Testing

Definitions and analysis:

Risk appetite framework

Risk Appetite Statement

Risk Tolerance

Risk Capacity

Risk Profile

Risk Limits


Risk appetite statement

Risk appetite statement management in liquidity risk

Establishment of the appropriate level of Risk appetite

Liquidity risk statement – Limit of tolerance approach

Liquidity risk statement – scenariobased approach


Liquidity Reserve

Decision between a buffer or a reserve

Risk Appetite Monitoring


Risk Appetite and IRRBB limits
Module 22: Stress Testing ALM

Stress Testing in asset and liability management

Principles of Effectiveness of the RA Statement

Establishment of Limits and Metrics:

KPIs and KRIS

Regulatory Stress Testing

Limits on Risk Weight Assets

capital planning

IRRBB Economic and Regulatory Capital

NSFR and LCR Liquidity Position

Leverage Ratio

RAROC

Difference between traditional and Risk Appetite limits

Best Practices in RA Statement

Monitoring and Validation of Risk Appetite

Global Exercise 47: Stress Testing, Global Economic Capital and Risk Appetite in Excel:

Capital estimation for interest risk

Risk Appetite for liquidity risk

Limits in the gap analysis

Dashboard with leverage ratio, regulatory liquidity ratios, KRIs, KPIS

Impact of stress testing on CET1, RWAs, P&L and Balance Sheet in 12 quarters
BALANCE SHEET OPTIMIZATION
Module 23: Balance Sheet Optimization

Balance Sheet Optimization

Definition of postCOVID19 scenarios

Stochastic and Dynamic Scenario Trees

dynamic programming

Multiperiod Stochastic Dynamic Programming

Maximization of the financial margin and economic value

Application of economic and financial theories

Conditioning factors of liquidity, capital and Basel III

COVID19 Stress Testing Scenarios

Optimization of the Capital Adequacy Ratio (CAR)

Determinants of IRRBB Risk Appetite

Exercise 48: Optimization of coverage ratios and stable financing with Excel Solver

Exercise 49: Optimization of the financial margin subject to restrictions of the leverage ratio, NSFR liquidity, LCR and capital, using multiperiod stochastic programming
CRYPTO EXPOSURES AND LIQUIDITY RISK
Module 24: Treatment of cryptographic exposures

The prudential treatment of crypto assets

Classification group 1, 2 and out of range

Classification conditions

Responsibilities for determining and monitoring compliance with classification conditions

Capital requirements of group 1 crypto assets

Group 1a Crypto Assets: Tokenized Traditional Assets

Credit and market risk


Group 1b crypto assets: crypto assets with stabilization mechanisms Stablecoins

Holders who can operate directly with the redeemer

Nonmember holders


Bankruptcy Remote Vehicle Treatment for Crypto Assets with an Underlying Pool of Assets

Equity Investment in Funds approach to crypto asset credit risk with a poolbacked stabilization mechanism


Capital requirements for Group 2 crypto assets

Other regulatory requirements

levarage ratio

great exhibitions

Liquidity ratios


Supervisory review and adjustments to Pillar 1 requirements

Bank responsibilities

Risks attributable to operational and cyber risk.

Risks attributable to the underlying technology.

Risks attributable to money laundering and terrorist financing


Supervisor Responsibilities

Disclosure Requirements for Crypto Assets

Treatment of derivatives that refer to Group 2 crypto assets
CONTINGENCY FUNDING PLANS CFP
Module 25: Contingency Financing Plans

Contingency Funding Plans CFP

Sources of Contingent Liquidity Risk

The underlying risk characteristics that define the need for contingency plans

The underlying risk characteristics that define the structure of contingency plans

Confidence on access to wholesale markets

Recognition of problems in the real world

Interconnection between contingency fund plans and liquidity policies

General requirements in contingency plans

Specific requirements in contingency plans

Exhaustive elaboration of Triggers

Action plans

Committee crisis management teams

Reporting

Importance of effective communication

Administration Plan

Test plan