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Liquidity Risk, Stress Testing and Inflation

COURSE OBJECTIVE


Innovative intensive course of 30 teaching hours, on management and advanced measurement of liquidity risk management and Basel III.

 

  • Recently, liquidity risk and credit risk have been increasingly worrying for risk managers at financial institutions, the bankruptcy of Silicon Valley Bank SVB has occurred, among other things, due to the run-off of deposits, and it is that the SVB recently warned that "liquidity risk may affect our ability to finance operations and jeopardize our financial condition".

  • High interest rates to stop inflation together with geopolitical risks have affected the assets of financial institutions. Therefore, we have added modules on the impact of inflation and geopolitical risks on financial assets. And a whole module to explain how to design the CFP Contingent Funding Plan.

  • The objective of the course is to show the most recent methodologies, strategies and techniques to manage and quantify the risk in the assets and liabilities of a bank, as well as explain liquidity risk models.

  • Recent Basel IV and EBA directives on ILAAP liquidity self-assessment processes have been included.

  • During the course, methodologies are shown to define, build and validate econometric models, scenario analysis, and stress testing models that meet the Basel III requirements.

  • The main price transfer systems are explained in detail, as well as strategies and tactics to control liquidity risk.

  • It exposes how to implement and define, the already regulatory, risk appetite in liquidity and interest rate risk. FTP and LFTP pricing methodologies.

  • Advanced methodologies are shown to create quantitative tools such as risk capital, economic value, EAR, dynamic gap, etc.

  • Econometric, machine learning, deep learning, and stochastic behavior models of prepayment, indefinite maturity deposits, and credit line withdrawals are taught.

  • We have added a module on the treatment of cryptographic assets that will have an impact on the liquidity of financial institutions.

 

WHO SHOULD ATTEND?

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The Course is aimed at ALM professionals, CFOs, Risk managers, Treasurers, analysts, pension fund managers, auditors, controllers, regulators and compliance staff.

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Schedules:

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  • Europe: Mon-Fri, CEST 16-19 h

 

  • America: Mon-Fri, CDT 18-21 h

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  • Asia: Mon-Fri, IST 18-21 h​

 

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Price:  6 900 €

Early Bird Price:  5 900 €

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Ending: June 7

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Level: Advanced

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Duration: 30 h

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Material: 

Presentations PDF

Exercises in R, Python, SAS and Excel

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AGENDA

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Liquidity Risk, Stress Testing and Inflation

IMPACT OF INFLATION

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Module 1: The impact of inflation on ALM asset and liability management

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  • ALCO's role

  • Term structure of interest rates and expected inflation

  • Monetary Policy, Inflation, and Commodity Prices

  • Inflation and Asset Prices

  • Inflation and Equity Returns

  • Inflation Hedge Through Asset and Sector Rotation

  • The impact on:

    • equity fundraising

    • fixed income securities

    • Strategic and Tactical Asset Allocation

  • The changing shape of risk

  • The historical role of gold

  • Possible trading strategies including:

    • Silver bullion

    • Gold Related Stocks

    • Exchange traded funds

    • Futures

    • Options

    • structured products

 

IMPACT OF COVID-19

 

​Module 2: MANAGEMENT OF COVID-19 in ALM

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  • Impact of COVID-19 on banking

  • Possible CSF reduction

  • Review and use of HQLA for COVID-19 crises

  • Rethinking of current contingency plans

  • Stress testing models and scenarios in time of COVID-19

  • Optimization of balance sheet positions

  • ALCO actions during the crisis

  • Impact of COVID-19 on the Libor transition

  • Modeling of Non Maturity Deposits NDM post COVID-19

  • Review of FTPs and FVA of derivatives

  • Negative interest rate review

  • Advanced modeling of credit line withdrawals

  • Real time monitoring

  • Use of artificial intelligence for asset and liability management

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IMPACT DUE TO GEOPOLITICAL RISK

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Module 3: Measurement of Geopolitical Risk

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  • Geopolitical risk measurement

  • Artificial intelligence applied to geopolitical risks

  • Machine Learning and Deep Learning

  • Quantitative versus qualitative approaches

  • Geopolitical risk ratings

  • Identify early warning signs

  • Identify key issues

  • interpretation of trends in financial and economic data.

  • Manage information

  • Creation of geopolitical indexes

  • Analysis of the main indices

  • Possible biases in the indices

  • Typology of articles for index improvements

  • Exercise 1: Geopolitical index construction using artificial intelligence in Python and R

  • Exercise 2: Analysis of main geopolitical risk indices

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Module 4: Liquidity Risk and Basel III

 

  • Liquidity Ratios

  • Basel III

    • 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 Off-balance sheet

  • wholesale funding risk

  • retail funding risk

  • Funding cost risk

  • Intraday liquidity risk

  • Cross-currency liquidity risk

  • Asset Risk

  • Funding concentration risk

  • Correlation risk

  • Contagion risk

  • Exercise 3: Estimation of the LCR and NSFR in a financial statement in Excel

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Module 5: Sources of Liquidity Risk

 

  • Main sources of liquidity risk:

  • Intragroup liquidity risk

  • Off-balance sheet liquidity risk

  • Wholesale financing risk

  • Retail financing risk

  • Financing cost risk

  • Intraday liquidity risk

  • Liquidity risk between currencies

  • active risk

  • Funding concentration risk

  • Correlation risk

  • Contagion risk

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BEHAVIOR MODELS

 

​Module 6: Prepayment Modeling

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  • 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 4: Prepayment exercise in the mortgage portfolio using neural networks and SVR

  • Exercise 5: Econometric and machine learning model of probability of prepayment in R

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Module 7: Models for the Use of Credit Lines

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  • 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 6: Credit line utilization model in R

  • Exercise 7: Credit line utilization model with neural networks in Python​

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Module 8: Modeling of liabilities without defined maturity

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  • 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

  • Option-Adjusted 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 8: Econometric model and simulation of liabilities without maturity in Excel

  • Exercise 9: Tranches of stable and unstable deposits in Excel

  • Exercise 10: Modeling behavior with logistic regression, neural networks, and SVC in R

  • Exercise 11: Portfolio Replication Approach in Excel

  • Exercise 12: Advanced econometric NMD model with cointegration tests and portfolio replica methodology in R

  • Exercise 14: Projection model with RNN and CNN neural networks

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LIQUIDITY RISK MEASUREMENT AND MANAGEMENT

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​​Module 9: Liquidity Risk Measurement II

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  • 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 15: Liquidity gap analysis in R

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

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Module 10: ILAAP Liquidity Self-Assessment

 

  • 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 17: Fund rollover analysis in Excel

 

Module 11: Management, Strategies and Mitigation of Liquidity Risk

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  • Failures in asset and liability management in the 2007-2009 crisis

  • Failure factors in the ALM

  • Liquidity control and management

  • Organizational model and Governance in practice

  • financing strategies

  • Treatment of wholesale financing

  • Retail Deposits in the current environment

  • Key metrics for liquidity risk management

    • tactics

    • strategic

  • Management of the liquidity reserve and committed assets

  • Concentration risk and measurement of funding risk

  • Concentration management using funding risk metrics

  • Concentration of funds using the Gini Index

  • Convexity of the gaps

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FUNDS TRANSER PRICING (FTP) 

 

​Module 12: Funds Transfer Pricing FTP and LFTP

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  • Funds Transfer Pricing FTP

  • 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 18: Transfer Prices and ordinary pool margin estimation in Excel.

  • Exercise 19: Transfer Pricing Matched Maturity approach

  • Exercise 20: LFTP conditioned to Basel III liquidity risk

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Module 14: Macroeconomic Scenarios

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  • Inflation and geopolitical risk

  • Macroeconomic inflation scenarios

  • geopolitical scenarios

  • climate scenarios

  • Converting Climate Scenarios to Macroeconomic Scenarios

  • scenario analysis

  • Design of adverse scenarios

  • Financial and economic shocks

  • Important macroeconomic variables

  • Structural macroeconomic models

  • Bayesian VaR

  • balance models

    • Dynamic Stochastic General Equilibrium (DSGE)

  • Non-equilibrium models

    • Sensitivity Analysis

  • ​Integrated assessment model (IAM)

  • Computable general equilibrium (CGE)

  • Overlapping generation

  • input-output

  • agent-based

  • Scenario analysis

  • Expert judgment in stage design

  • Scenario severity score

  • scenario validation

  • Exercise 21: Advanced model of BVaR and DSGE macroeconomic scenarios

  • Exercise 22: Inflationary risk scenarios

  • Exercise 23: Geopolitical risk scenarios​

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LIQUIDITY RISK STRESS TESTING

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​Module 15: Stress Testing of Liquidity Risk

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  • 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

    • Bottom-up approach

    • Top-Down Approach

    • hybrid approach

    • Assessment of the methodologies

  • Stage design

    • Benchmark Liquidity Stress Scenarios

    • Modeling of Haircuts and Add-ons

    • Magnitude Run-Off Rates

    • Link of liquidity and solvency

  • Modeling and Stress Tresting of the Run-Off with econometric models

  • Stress Testing in Contractual Cash Flows

  • Stress Testing in behavioral cash flows

  • Global Exercise 24: Stress Testing of liquidity risk in financial statements, simulation of macroeconomic scenarios, impact on behavioral and contractual flows and Run-off rates in R

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REVERSE LIQUIDITY STRESS TESTING

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Module 16: Reverse Liquidity Stress Testing

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  • 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

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BALANCE SHEET OPTIMIZATION

 

Module 17: Balance Sheet Optimization

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  • Balance Sheet Optimization

  • Definition of post-COVID-19 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

  • COVID-19 Stress Testing Scenarios

  • Optimization of the Capital Adequacy Ratio (CAR)

  • Determinants of IRRBB Risk Appetite

  • Exercise 25: Optimization of coverage ratios and stable financing with Excel Solver

  • Exercise 26: Optimization of the financial margin subject to restrictions of the leverage ratio, NSFR liquidity, LCR and capital, using multi-period stochastic programming

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RISK APPETITE LIQUIDITY RISK

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Module 18: Risk Appetite in liquidity risk

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  • 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 – scenario-based approach

  • Liquidity Reserve

    • Decision between a buffer or a reserve

    • Risk Appetite Monitoring

  • Risk Appetite and IRRBB limits

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Module 19: Risk Appetite Statement and Stress Testing

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  • 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 27: Stress Testing, Global Economic Capital and Risk Appetite in Excel:

  • Capital estimation for credit risk, market, counterparty, interest rate, operational, business and concentration.

  • Limits Exercise

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

  • Impact of stress testing on CET1, RWAs, P&L and Balance Sheet in 12 quarters

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CRYPTO EXPOSURES AND LIQUIDITY RISK

 

​Module 20: 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

      • Non-member 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 pool-backed 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

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CONTINGENCY FUNDING PLANS CFP

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​Module 21: Contingency Financing Plans

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  • 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

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