Table of Contents
Cover
Title Page
Foreword Paul Fisher
NOTES
Foreword Professor Alexander Lipton
Foreword Rundheersing Bheenick
Preface
ORGANISATION OF THE BOOK
ACCOMPANYING WEBSITE
ADDITIONAL CONTRIBUTORS
Acknowledgments
THE “UB40” VERY SPECIAL THANKS
THANKS FOR GREAT LEADERSHIP
A GENUINE TEAM: NEWDIGATE FOOTBALL CLUB
NEAL ARDLEY FAN CLUB
SPECIAL BANKS THANK YOU
GOODBYE
FINALLY, A SPECIAL SOMETHING …
NOTE
About the Author
List of Extract Book Titles
PART I: Principles of Banking, Finance and Financial Products
CHAPTER 1: A Primer on Banking, Finance and Financial Instruments
AN INTRODUCTION TO BANKING
AN INTRODUCTION TO DEBT FINANCIAL MARKETS
AN INTRODUCTION TO FINANCIAL MARKET PRODUCTS
BANK STRUCTURES AND BUSINESS MODELS
APPENDIX 1.A: Financial Markets Arithmetic
APPENDIX 1.B: Leadership Lessons From The World of Sport
APPENDIX 1.C: The Global Master Repurchase Agreement
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
CHAPTER 2: Derivative Instruments and Hedging
ASSET SWAPS AND RELATIVE VALUE
POST‐2008 CRASH SWAP DISCOUNTING AND VALUATION PRINCIPLES
APPENDIX 2.A: The Par Asset Swap Spread
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
CHAPTER 3: The Yield Curve
CONSTRUCTING THE BANK'S INTERNAL YIELD CURVE
MARKET APPROACH FOR FTP CURVE CONSTRUCTION
APPLICATION OF ORDINARY LEAST SQUARES METHOD AND NELSON‐SIEGEL FAMILY APPROACHES
SONIA YIELD CURVE
CONCLUSION
APPENDIX 3.A: ALCO Submission Paper
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
CHAPTER 4: Eurobonds, Securitisation and Structured Finance
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
PART II: Bank Regulatory Capital and Risk Management
CHAPTER 5: Banks and Risk Management
THE RISK MANAGEMENT UNIVERSE FOR BANKS
POLICY TEMPLATES
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
CHAPTER 6: Banks and Credit Risk
UNDERSTANDING AND MANAGING CREDIT RISK: PART 1
DE(RE)CONSTRUCTING THE B2 CREDIT RISK AIRB FORMULA
UNDERSTANDING AND MANAGING CREDIT RISK: PART 2
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
CHAPTER 7: Understanding and Managing Operational Risk
OPERATIONAL RISK OVERVIEW
CONDUCT RISK
OPERATIONAL RISK MEASUREMENT
OPERATIONAL RISK MEASUREMENT CONCEPTS
BASIC INDICATOR APPROACH
STANDARDISED APPROACH
ADVANCED MEASUREMENT APPROACH
KEY RISK INDICATORS
OPERATIONAL RISK MANAGEMENT FRAMEWORK
OPERATIONAL RISK CAPITAL ALLOCATION
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
CHAPTER 8: Regulatory Capital and the Capital Adequacy Assessment Process
REGULATORY CAPITAL FRAMEWORK
CAPITAL AND BALANCE SHEET MANAGEMENT AND THE ICAAP PROCESS
CAPITAL ADEQUACY AND STRESS TESTING
PRACTICAL ISSUES AND BEST‐PRACTICE ICAAP PREPARATION
CONCLUSIONS
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
CHAPTER 9: Financial Statements, Ratio Analysis, and Credit Analysis
FINANCIAL RATIO ANALYSIS
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
PART III: Bank Treasury and Strategic Asset–Liability Management
CHAPTER 10: The Bank Treasury Operating Model and ALCO Governance Process Best‐Practice
THE TREASURY AND ALCO OPERATING MODELS: SINGLE LEGAL ENTITY STRUCTURE
THE TREASURY AND ALCO OPERATING MODELS: GROUP STRUCTURE
TREASURY POLICY STATEMENT: EXAMPLE TEMPLATE
CONCLUSION
APPENDIX 10.A: Bank Asset and Liability Management Committee (ALCO) Template Terms of Reference
APPENDIX 10.B: Liquidity Risk Early Warning Indicators (EWI) Template
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
CHAPTER 11: Bank Asset–Liability Management (ALM) and “Strategic ALM”
THE BALANCE SHEET RISK TRIUMVIRATE: THE INTERACTION OF THE ALM FUNCTION WITH MARKETS, FINANCE, AND RISK
STRATEGIC ALM
IMPLEMENTING STRATEGIC ALM
INVESTOR RELATIONS (IR) AND THE CREDIT RATING PROCESS
CONCLUSIONS
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
CHAPTER 12: Liquidity and Funding: Policy, Management, and Risk Management
PART 1: LIQUIDITY RISK AND LIQUIDITY RISK MANAGEMENT
PART 2: ILAAP AND STRESS TESTING
BANK INTERNAL FUNDS TRANSFER PRICING (FTP OR IFP)
OPTIMUM LIABILITIES STRATEGY AND MANAGING THE LIQUID ASSETS BUFFER
COLLATERAL FUNDING MANAGEMENT, FVA, AND CENTRAL CLEARING FOR OTC DERIVATIVES
NEGATIVE INTEREST RATES AND THE IMPACT ON ALM POLICY
PART 3: SUMMARY AND ANALYSIS OF PRA CP21/16 AND CP13/17: “PILLAR 2: LIQUIDITY”
PART 4: SAMPLE POLICY STATEMENTS
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
CHAPTER 13: Market Risk and Non‐Traded Market Risk (Interest‐Rate Risk in the Banking Book)
UNDERSTANDING AND MANAGING MARKET AND INTEREST‐RATE RISKS
MANAGING INTEREST‐RATE RISK IN THE BANKING BOOK (IRRBB)
BCBS386: THE BASEL COMMITTEE AND HIGH LEVEL PRINCIPLES FOR INTEREST‐RATE RISK IN THE BANKING BOOK
ILLUSTRATION: STRATEGIC ALM POLICY AND APPROACH TO IRRBB
INTEREST‐RATE RISK POLICY AND ALCO
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
CHAPTER 14: The Future of Bank Treasury and Balance Sheet Risk Management
THE NEW TREASURY
THE TREASURY “SECOND LINE OF DEFENCE”
TREASURY AND THE RISK TRIUMVIRATE: THE NEED FOR AN AGGREGATE APPROACH ENABLING INTEGRATED MANAGEMENT OF THE BALANCE SHEET
APPENDIX 14.A: Sample Group ALCO Template
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
CHAPTER 15: Regulatory Reporting and Principles of Policy Documentation
REGULATORY REPORTING FOR CAPITAL AND LIQUIDITY
PRINCIPLES OF POLICY DOCUMENTATION
TEMPLATE POLICY DOCUMENTATION
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
PART IV: The Future of Banking: Strategy, Governance and Culture
CHAPTER 16: Strategy Setting: Principles for Sustained Bank Viability
BANK STRATEGY INPUTS AND SETTING
FROM VISION TO A STRATEGIC PLAN
EXAMPLE: “SWOT” ANALYSIS FOR MEDIUM‐SIZED UK COMMERCIAL BANK
CONCLUSIONS
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTES
CHAPTER 17: Present and Future Principles of Governance and Culture
CORPORATE GOVERNANCE WITHIN BANKING
THE ROLE OF LEADERSHIP AND TEAMBUILDING EXCELLENCE IN GOOD BANKING
CONCLUSIONS
SELECTED BIBLIOGRAPHY AND REFERENCES
NOTE
CHAPTER 18: Present and Future Principles of Banking: Business Model and Customer Service
WEBSITE READING
CUSTOMER SERVICE MODEL: THE MODEL BANK
CHOUDWEST BANK: THE MODEL BANK AND “CONCIERGE BANKING”
APPENDIX 18.A: Basic Principles of Bank Marketing
NOTES
PART V: Case Studies: Analysis, Coherent Advice and Problem Solving
CHAPTER 19: Case Studies: Analysis, Coherent Advice and Problem Solving
COHERENT ADVICE AND PROBLEM SOLVING: CASE STUDIES
CASE STUDY: REVIEW OF BANK FUNDING STRUCTURES 1999–2009
CASE STUDY: HIGH‐LEVEL STRATEGIC BANK REVIEW
CONCLUSION
APPENDIX 19.A: Sample Review Questions
SELECTED BIBLIOGRAPHY AND REFERENCES
CHAPTER 20: Guide to the Website
CHAPTER FILES
NOTES
Afterword
Index
End User License Agreement
List of Tables
Chapter 1
Table P.1 Selected banking activities and services
Table P.2 European regional bank, earnings structure 2004
Table 1.1 Bank analysis ratios for capital strength
Table 1.2 Timeline
Table 1.3 Components of a bank balance sheet
Table 1.4 Components of a bank income statement, typical structure for a retail bank
Table 1.7 Selected global currency conventions
Table 1.1 Selected Government Bond Market Characteristics
Table 1.2 Selected Government Bond Markets, Yield Curves as at 2 December 2013
Table 1.5 Selected Country Market Accrued Interest Day‐Count Basis
Table 4.1 Terms of classic repo trade.
Table 4.2 Summary of highlights of classic repo and sell/buy‐back.
Table 4.3 Stock loan transaction.
TABLE 1.1 “Cash” Products
Table B.1 Discount Factor Table
Chapter 2
Table 13.1 Description of LIFFE short sterling future contract
Table 13.4 Basic option terminology
Table 13.5 Bank simplified gap report
Table 13.6 Net interest income scenarios
Table 13.7 Net interest income and option hedge
Table 13.1 Three‐Year Cash Flows
Table 13.2 Swap Quotes
Table 13.3 Generic Interest‐Rate Swap
Table 13.4 Generic Interest‐Rate Swap (Excel formulae)
Table 12.1 CBOT U.S. T‐Bond Futures Contract Specifications
Table 12.3 Bond Futures Hedge for Hypothetical Gilt Portfolio, 20 October 1999
TABLE 2.3 Conversion factors for deliverable gilts, Dec00 to Mar02 long gilt contracts.
Table 2.3 Sample 5‐year CDS premiums, September 2003.
Table 2.1 Jackfruit Music Ltd, buying bonds versus selling protection.
Table 2.2 Cash versus synthetic market considerations.
Table 2.4 Sample 5‐year CDS premiums, 8 December 2008.
Table 1.1 Example of CDS spread pricing
Chapter 3
Table 5.1 Coupon, spot and forward yields.
Table 5.2 Hypothetical set of bonds and bond prices.
Table 5.3 Discount factors calculated using the bootstrapping technique.
Table 5.9 Correlation between the USD 10‐year swap spread, the CBOE VIX index, the 10‐year US Treasury yield and the CBOE VIX index.
Table 12.1 Duration and yield comparisons for bonds in a hypothetical inverted curve environment, October 1999.
Table 12.2 Yields and excess yield spreads for selected gilts, 22 October 1999.
Table 12.2 Bond basis point value, 22 October 1999.
Chapter 4
Table 6.1 Selected Eurobond issues in first half of June 2005.
Table 6.2 Expense elements, Eurobond issue.
Table 7.4 ABC plc 10% 2019 Convertible Hypothetical Bond Terms.
Table 8.1 Summary of credit rating agency bond ratings.
Table 8.2 Average CDO portfolio losses and tranche write‐down. Source: JPMorgan
Chapter 5
Table 1.1 Characterising risk.
Table 2.1 Calculation of standard deviation.
Table 2.2 Standard deviation.
Table 2.3 Probabilities extracted from the normal distribution table.
Table 2.4 Normal distribution illustrated for portfolio return.
Table 2.5 Correlation.
Table 3.1(i) Two‐asset portfolio VaR.
Table 3.1(ii) Spreadsheet formulae for Table 3.1(i).
Table 3.2 Asset correlation.
Table 3.3 Correlation matrix: three‐asset portfolio.
Table 3.7 Comparison of VaR methods.
Chapter 6
TABLE 6.1 Formulae and description for the key ratios
Table 3.5 Moody's recovery rates for varying levels of loan seniority, 2006.
Chapter 7
TABLE 7.1 Operational risk failure: types and examples
Chapter 8
TABLE 8.1 Overview of the ICAAP processes
TABLE 8.2 AT1 and T2 instrument requirements
TABLE 8.3 Basel III Final Form key features
TABLE 8.4 Level 1 risk taxonomy
TABLE 8.5 Example risk indicator levels
TABLE 8.6 Sample Incorporation of an Institution's Relevant Risk Types in the ICAAP
TABLE 8.7 Capital management risk taxonomy
TABLE 8.8 MIRA material risks
TABLE 8.9 SREP slide
TABLE 8.10 Point‐in‐time capital assessment
TABLE 8.11 Base Case capital projection
TABLE 8.12 Summary of potential management actions in stress
Chapter 9
TABLE 9.1 Constructa plc RONA ratio measures
TABLE 9.2 UK plc corporate performance 1995–1999
TABLE 9.3 Constructa plc corporate‐level ratios
TABLE 9.4 Hypothetical company results
TABLE 9.5 Gearing ratios
TABLE 9.6 Comparable company financial indicators, year 2000
TABLE 9.7 Peer group company ratios, mean values, and Constructa plc market valuation
Table 4.1 S&P ratio benchmarks, 1997.
Chapter 10
Table 8.1 ALCO main mission
Table 10.1 ALCO membership.
Table 10.4 Hypothetical capital approval limit structure.
Table 10.8 Bank operating functions relevant to Treasury.
Chapter 11
Table 5.1 Simplified ALM profile for regional European bank
Table 5.2 Funding the liquidity gap: two examples
Table 5.3 XYZ Securities Limited ALM report and profile
Table 5.4 Assumed XYZ Securities Ltd FRN book (yields represent market rates as at September 2004)
Table 6.1 Hypothetical money market rates
Table 6.2 Example gap profile: UK bank
Table 6.3 Detailed gap profile: UK bank
Table 6.4 Banking book PVBP grid report
TABLE 11.1 Summary of asset–liability policy guide
TABLE 11.2 Lending Products across Divisions
TABLE 11.3 Third Party Assets and Liabilities
Chapter 12
Table 12.1 Group organisation ALCO roles.
Table 13.1 LTD gap assumptions and definitions.
Table 13.2 Sample liquidity ratio report extract, banking group.
Table 13.3 Liquidity report and liquidity ratio calculation.
Table 13.4 Liquidity risk factor.
Table 13.5A Large depositors as percentage of total funding report.
Table 13.5B Largest depositors report.
Table 13.6 Sector funding source report.
Table 13.7 Sample inter‐group lending report.
Table 13.10 Cash flow survival horizon and outflow limit metric.
Table 13.11 Short‐term wholesale funding report.
Table 13.12 Liquidity risk appetite.
TABLE 12.1 MTA balances observation
TABLE 12.2 Savings deposits balances observation
TABLE 12.3 Behavioural tenor via balance observation, by account cohort
TABLE 12.4 Deposit outflow results, UK commercial bank
TABLE 12.5 LCR report summary
TABLE 12.6 UK PRA ILAA report summary
TABLE 12.7 Three broad categories used to formulate the nature of certain events in a bank
TABLE 12.8 Three sample regulatory frameworks
TABLE 12.9 Two minimum standards for liquidity
TABLE 12.10 Example LCR denominator calculation
TABLE 12.11 Operational and non‐operational deposits
TABLE 12.12 Stable and less stable deposits
TABLE 12.13 Deposit outflow assumptions, extract of product and customer breakdown for a UK bank
TABLE 12.14 LCR calculation for a European commercial bank
TABLE 12.15 Competitor deposit interest rates template, UK banking market. XYZ Bank is “our” bank
TABLE 12.16 NSFR calculation
TABLE 12.17 Risk areas banks account for when formulating liquidity stresses
TABLE 12.18 Type A versus Type B deposits
TABLE 12.19 Specimen ILAA Contents
TABLE 12.20 Hypothetical bank internal funds price curve (“FTP” or “TLP” curve)
TABLE 12.21 Undrawn commitments FTP pricing grid
TABLE 12.22 Considerations during the liabilities strategy setting stage
TABLE 12.23 Sample of potential range of liabilities strategies
TABLE 12.24 Requirements for LAB (or HQLA) eligibility
TABLE 12.25 Illustration maximum net debit for given day
TABLE 12.26 Illustration mean average maximum net debit
TABLE 12.27 Worked example of “Pillar 2” implementation of liquidity risk and LCR calculation
Chapter 13
Table 15.4 Calculation of interest‐rate risk sensitivities for a 4‐year bond, given a zero‐coupon curve
Table 15.5 Table showing Excel formulas
Table 15.6 Bond convexity calculation
Table 15.7 Convexity calculation spreadsheet formula
Table 15.8 Futures hedge calculation spreadsheet
Table 15.9 Table 15.8 with Microsoft Excel formulas shown
TABLE 13.1 Specimen Interest Rate Gap Report
TABLE 13.2 Specimen NII sensitivity calculation
TABLE 13.3 Illustrative Maturity Schedule Time Buckets for EVE Calculation
TABLE 13.4 Specimen interest‐rate gap report for a 5‐year fixed‐rate bullet loan funded by a 3‐month deposit
TABLE 13.5 Specimen interest‐rate gap report for a 5‐year fixed‐rate bullet loan funded by a 3‐month deposit hedged by an interest rate swap
TABLE 13.6 Bank IRR repricing gap example
TABLE 13.7 Natural cash hedging arising out of normal customer business (fixed‐rate against fixed‐rate and current account in credit against overdrafts)
Chapter 14
TABLE 14.1 Scope of Treasury activities, reprised
Chapter 15
TABLE 15.1 Changes to Gabriel Reporting under COREP and FINREP
TABLE 15.2 Intra‐day monitoring tools
Chapter 16
Table 16.1 Bank strategy setting: quantitative targets.
Table 16.2 Performance against strategy: example quarterly report.
TABLE 16.1 Strategic metrics and KPIs
Chapter 17
Table 18.1 Bank governance: committee overview.
Table 17.1 Examples of Board sizes and committees
Table 17.2 Example of Board meeting frequencies over time
Chapter 18
TABLE 18.1 Sample of customer issues with their banking services
TABLE 18.2 Crowded competitive landscape – no single bank meets all customer types' requirements
Chapter 19
TABLE 19.1 EAB deposit rates as at January 2009
TABLE 19.2 Regime implemented at the London subsidiary
TABLE 19.3 EAB deposit rates as at June 2009
TABLE 19.4 Final EAB FTP monthly curve format
TABLE 19.5 Other arrangements
TABLE 19.6 UK commercial bank IRRBB reporting
TABLE 19.7 Template to determine cost of holding standalone deposits inclusive of Liquidity Buffer costs
List of Illustrations
Chapter 1
Figure 1.1 Scope of banking activities
Figure 1.2 Composition of earnings
Figure 1.5 The structure of the money market
Figure 1.6 Bloomberg page DES for Australian dollars
Figure 1.7 Bloomberg page DES for Brazilian real
Figure 1.8 Bloomberg page DES for Egyptian pound
FIGURE 1.1 Libor screen on Bloomberg, 13 September 2016.
FIGURE 1.2 Libor history 2011–2016.
FIGURE 1.3 Sterling curves, 13 September 2016.
Figure 1.1 Bloomberg screen DCX used for US dollar market, three‐month loan taken out 7 May 2004
Figure 1.2 Bloomberg screen DCX for Singapore dollar market, three‐month loan taken out 7 May 2004
Figure 1.3 London sterling money market rates. Extract from
Financial Times
, 11 March 2004.
Figure 2.1 Bloomberg major currency monitor page, 10 May 2004
Figure 1.1 Bloomberg Screen DES Showing Details of 4⅝ % 2010 Issued by Republic of Singapore as of 20 October 2003
Figure 1.3 Bloomberg YA Page for Yield Analysis
Figure 1.4 The Price/Yield Relationship
Figure 4.1 Classic repo transaction for 100‐worth of collateral stock.
Figure 4.2 Diagram of classic repo trade.
Figure 4.3 Bloomberg screen RRRA for classic repo transaction, trade date 5 July 2000.
Figure 4.4 Bloomberg screen for the classic repo trade illustrated in Figure 4.5.
Figure 4.5 Corporate treasury classic repo.
Figure 4.12 Bloomberg screen used to calculate nominal value of collateral required in a stock loan transaction.
Figure 4.20 Illustration of variation margin process
Chapter 2
Figure 13.1 Key dates in an FRA trade
Figure 13.2 Rates used in FRA pricing
Figure 13.6 LIFFE short‐sterling contract analysis, 25 March 2004
Figure 13.7 LIFFE short‐sterling forward rates analysis, 25 March 2004
Figure 13.8 Bloomberg page DES for Eurodollar contract
Figure 13.9 Bloomberg screen TED page, used to calculate hedge requirements for UK 8½% 2005 gilt, 11 November 2003
Figure 13.13 Payoff profile for a bond futures contract
Figure 13.14 Payoff profile for call‐option contract
Figure 13.15 Basic option payoff profiles
Figure 13.1 Cash Flows for Vanilla Interest‐Rate Swap
Figure 13.2 Libor‐OIS Spread, 2002–2008
Figure 13.5 SONIA Average Rate Minus BoE Repo Rate, 1999–2000
Figure 13.6 Tullet US Dollar Deposit Rates, 10 November 2003
Figure 13.7 Garban ICAP U.S. Dollar OIS Rates, 10 November 2003 Used with permission of Bloomberg L.P.
Figure 13.8 Illustration of Interest Basis Mismatch Hedging Using OIS Instrument
Figure 12.1 Bond Futures Delivery Quotes, Bloomberg Page DLV, 2 December 2013
FIGURE 2.6 Delivery basket for Jun00 long gilt, Bloomberg page DLV, 15 March 2000.
Figure 2.7 Bloomberg YA page for
2010 gilt, showing accrued interest for value 13 August 2001.
Figure 2.8 Bloomberg DLV page for Sep01 (U1) gilt contract, showing gross basis, net basis and IRR for trade date 12 August 2001.
Figure 2.9 Bloomberg HCG page for Sep01 (U1) gilt contract, showing CTD bond history up to 12 August 2001 with changes in futures price.
Figure 2.10 Bloomberg HCG page for Sep01 (U1) gilt contract, showing CTD bond history up to 12 August 2001, with changes in IRR.
Figure 2.5 Credit derivatives isolate credit as an asset class and risk element.
Figure 2.6 Credit default swap (CDS).
Figure 2.7 Investment‐grade CDS levels, 2001–2002.
Figure 2.25 Total return swap.
Figure 1.10 Illustration of cash flows in a default swap
Figure 1.11 Bloomberg page CDSW using modified Hull‐White pricing for selected credit default swap, April 12, 2006
Figure 19.2
Bloomberg Page IRSB for Pounds Sterling, Showing GBP Swap Rates and Swap Spread over U.K. Gilts
Figure 19.3 Bloomberg Page ASW for GKN Bond, August 10, 2005
Figure 19.4 Bloomberg Page YAS for GKN Bond, August 10, 2005
Figure 19.5 Bloomberg Page YAS for GKN Bond, August 10, 2005 Showing Z‐Spread History
Figure 19.7 Bloomberg Graph Using Screen G <GO>, Plot of Asset‐Swap Spread and CDS Price for GKN Bond, April–September 2005
Figure 19.8 GKN Bond, CDS Basis During August–September 2005
FIGURE 2.1 Worked example of a Euribor swap
FIGURE 2.2 Cross‐currency basis swap example
FIGURE 2.3 Swap transacted under a CSA agreement
FIGURE 2.4 GBP Swaps and OIS curves, September 2016
FIGURE 2.5 Impact of discount rate on swap NPV
FIGURE 2.6 Relationship between Libor and discount factors
FIGURE 2.7 How collateral impacts the discount rate
FIGURE 2.8 Separating the forecasting and discounting curve
FIGURE 2.9 Valuing a collateralised swap
FIGURE 2.10 Combined interest flows of the loan and the interest rate swap
FIGURE 2.11 No application of hedge accounting
FIGURE 2.12 Application of fair value hedge accounting
Chapter 3
Figure 5.1 Bloomberg screen BBAM, daily Libor fixing page, as at 10 May 2004.
Figure 5.2 Bloomberg screen ICAU2, Garban ICAP broker's price screen for US dollar OIS swaps, 10 May 2004.
Figure 5.3 Eurodollar yield curve, 10 May 2004.
Figure 5.4 Bloomberg screen MMCV, inter‐bank fixings for HKD and SGD, and AUD deposit rates as at 6 September 2004.
Figure 5.5 YTM yield curves.
Figure 5.6 US menu page from screen IYC on Bloomberg.
Figure 5.7 US yield curves, August 2006.
Figure 5.8 Coupon yield curves.
Figure 5.10 Redemption, spot and forward yield curves: traditional analysis.
Figure 5.11 Discount function.
Figure 5.24 Tullet & Tokyo brokers USD interest‐rate swaps page on Bloomberg, as at 3 July 2006.
Figure 5.25 US Treasury yield curve as at 3 July 2006.
Figure 5.26 USD and GBP interest‐rate swap spreads over government curve, 1997–2006.
Figure 5.27 Comparison of USD 10‐year swap spread and 3‐month Libor–GC repo spread.
Figure 5.28 GBP swap spreads and gilt spreads compared 1997–2006.
Figure 5.29 VIX index versus US 10‐year swap spread.
Figure 5.30 VIX index versus US 10‐year Treasury.
Figure 5.1 An example of a Weiner process.
Figure 5.2 An example of a Poisson process.
Figure 12.1 Yield and duration of gilts, 21 October 1999.
Figure 12.2 T‐bill and par yield curve, October 1999.
Figure 12.3 Structure of bond yields, October 1999.
FIGURE 3.1 Curve results when employing Nelson‐Siegel and OLS methods
FIGURE 3.2 GBP SONIA and GBP Swap curves, 13 October 2016
Chapter 4
Figure 6.1 Non‐government international bond issuance, 2004–2008.
Figure 7.2 Convertible Bond and Conversion Premium
Figure 8.1 Bloomberg screen RATD showing rating agency investment‐grade ratings scale.
Figure 8.2 Bloomberg screen RATD showing rating agency sub‐investment grade ratings scale.
Exhibit 1.1 The securitization process
Exhibit 1.2 Cash flow waterfall (priority of payments)
Exhibit 1.3 Master trust structure
Exhibit 1.6 Columbus Nova CLO DES page
Chapter 5
FIGURE 5.1 Overview of a risk management framework
Figure 2.1 The log‐normal distribution.
Figure 2.2 Confidence intervals.
Figure 2.3 Differing standard deviations.
Figure 2.4 Differing means around the same standard deviation.
Figure 2.5 Differing standard deviations.
Figure 2.6 Historical volatility chart.
Figure 3.1 VaR and the normal distribution.
Figure 3.2 Matrix variance–covariance calculation for the two‐asset portfolio shown in Table 3.1.
Figure 3.3 PORT screen showing holding of GBP1 million Aston Martin Capital Ltd
2018 sterling corporate bond.
Figure 3.4 PORT screen showing VaR results by methodology, for bond holding at Figure 3.3
Figure 3.5 PORT screen showing the VaR distribution of values by selected confidence interval.
Chapter 6
FIGURE 6.1 Credit loss distribution
FIGURE 6.2 Applying credit loss distributions into capital calculation
FIGURE 6.3 Risky asset portfolio and capital structure
FIGURE 6.4 Summary of a risk‐weighted assets calculation for a retail and corporate customer commercial bank
FIGURE 6.5 Losses to be absorbed by capital
FIGURE 6.6 Loan principal cash flow profile
FIGURE 6.7 Comparison of RAROC versus EVA
Figure 3.5 Notional value risk exposure profiles of different product types.
Figure 3.6 BBB CDS level versus historic recovery rate (rates are average for industry in April 2005).
Figure 3.7 Default rate versus recovery rate.
Figure 3.8 High yield sector default rate versus recovery rate.
Figure 8.4 Comparison of distribution of market returns and credit returns.
Chapter 8
FIGURE 8.1 Recommended governance structure for the ICAAP
FIGURE 8.2 Stylised representation of a typical commercial bank balance sheet
FIGURE 8.3 Expected and unexpected losses
FIGURE 8.4 Capital structure considerations under CRR / CRDIV
FIGURE 8.5 Estimating the combined buffer requirement for a bank under Basel III
FIGURE 8.6 RWA breakdown
FIGURE 8.7 Capital considerations
FIGURE 8.8 Hypothetical new bank capital structure minimum compliance with Basel III
FIGURE 8.9 Formulating capital management strategy
FIGURE 8.10 The Three Pillars of Capital and Risk Management
FIGURE 8.11 Steps involved in the design of ICAAP
FIGURE 8.12 Three‐level scenario
FIGURE 8.13 All‐embracing ICAAP governance process
FIGURE 8.14 Summary of the ICAAP planning and implementation process, linking strategy, and capital management
FIGURE 8.15 Point‐in‐Time Capital Assessment (1‐year horizon) Pillar 1 and Pillar 2A
FIGURE 8.16 Capital surplus / deficit
FIGURE 8.17 ICA timeline
FIGURE 8.18 Projected capital surplus
FIGURE 8.19 Cross‐functional collaboration: Different functions of a bank must work together closely to produce the ICAAP
Chapter 9
FIGURE 9.7 “Three stages” impairment model
FIGURE 9.8 IFRS9 Framework
Chapter 10
FIGURE 10.1 Balance sheet risk management triumvirate
Figure 8.1 ALCO reporting input and output
Figure 10.4 Group Treasury and local ALCO communication structure.
Figure 10.5 GALCO and Group Treasury organisation.
Figure 10.6A Treasury organisation, cost centre.
Figure 10.6B Treasury organisation, profit centre.
FIGURE 10.2 Treasury operating model overview
FIGURE 10.3 Orthodox front‐office Treasury function
FIGURE 10.4 Front‐office Treasury function with Sales function
FIGURE 10.5 Treasury high‐level operating model overview and linkages
FIGURE 10.6 Centralised Group Treasury model
FIGURE 10.7 Centralised Group Treasury model efficiency
FIGURE 10.8 Decentralised Group Treasury model
FIGURE 10.9 Decentralised Group Treasury model efficiency
Chapter 11
Figure 5.1 Cornerstone of ALM philosophy
Figure 5.2 Securities and derivatives trading house ALM profile
Figure 5.3 CP programme liability profile
Figure 5.4 ALM time profile
Figure 5.5 Funding position on a daily basis
Figure 5.6 Cornerstone of ALM philosophy
Figure 5.7 XYZ Securities Limited funding usage and limit report
Figure 5.8 XYZ Securities Limited funding usage by business line
Figure 5.9 FRN book: schematic of booking cash flows
Figure 6.1 Change in spread between the 3‐month prime rate and 3‐month Libor 2005–06.
Figure 6.2 Gap limit report
Figure 6.3 Gap maturity profile in graphical form
Figure 6.4 Gap maturity profile, bank with no short funding allowed
Figure 6.5 Gap maturity profile, UK high‐street bank
Figure 6.6 Liquidity analysis – example of UK bank profile of maturity of funding
FIGURE 11.1 Model A
FIGURE 11.2 Model B
FIGURE 11.3 Model C
FIGURE 11.4 Cost of Basel III implementation
FIGURE 11.5 Mitigating the Impacts of Basel III
FIGURE 11.6 Recommended Board risk appetite statement template
FIGURE 11.7 Recommended bank executive committee organisation structure
FIGURE 11.8 Balance sheet mix optimisation
FIGURE 11.9 Example of peer‐review benchmarking: funding and capital
FIGURE 11.10 Example of peer‐review benchmarking: funding, capital, and profitability
FIGURE 11.11 Example of peer‐review benchmarking: liquid asset buffer
FIGURE 11.12 Example of peer‐review benchmarking: loan‐deposit ratio
FIGURE 11.13 Components of Bank P&L
FIGURE 11.14 NIM System View Selections
FIGURE 11.15 NIM System Product Lines
FIGURE 11.16 NIM system general ledger and P&L structure
FIGURE 11.17 Business line linkage to economic KPIs
FIGURE 11.18 Example illustrations of NIM analysis
FIGURE 11.19 Example illustrations of Balance Sheet and P&L analysis
FIGURE 11.20 Gross interest income expected after user‐specified adjustment to customer and/or funding rates
FIGURE 11.21 Example of drill‐down NIM stress testing capability
FIGURE 11.22 Integrated NIM analytics and liquidity management functionality
FIGURE 11.23 S&P bank ratings approach
FIGURE 11.24 Standard & Poor's (S&P) banks rating methodology summary
Chapter 12
Figure 12.2 Liquidity policy structure.
Figure 12.3 Liquidity policy statement: risk management governance structure.
Figure 12.4 Bank Group ALCO governance structure.
Figure 13.1 LTD funding gap limit.
Figure 13.2 Cumulative liquidity model.
Figure 13.4A Contractual and accelerated amortisation profile, retail mortgages.
Figure 13.4B The cash capital position
Figure 13.5 Encumbered asset ratio trend.
Figure 13.6 Market lock‐out period or “survival period”.
Figure 13.7 Trend of cash outflow survival period.
Figure 13.8A Wholesale liabilities: short term.
Figure 13.8B Wholesale liabilities: long term.
FIGURE 12.1 Contractual ALM gap
FIGURE 12.2 Behavioural ALM gap
FIGURE 12.3 Graphical observation to set tenor
FIGURE 12.4 Committed back‐up facility usage behaviour
FIGURE 12.5 Committed revolving credit facility usage behaviour
FIGURE 12.6 Committed term loan facility usage behaviour
FIGURE 12.7 Derivatives portfolio net cash‐flow tenor profile
FIGURE 12.8 Stress test results: cash‐flow survival horizon
FIGURE 12.9 Stress test results, after mitigating actions
FIGURE 12.10 LCR coverage
FIGURE 12.11 Bank LCR calculation and HQLA result
FIGURE 12.12 Transition to COREP in the European Union
FIGURE 12.13 End‐to‐End Liquidity Stress Testing Process
FIGURE 12.14 Specimen Daily Maximum Liquidity Requirement
FIGURE 12.15 Bank balance sheet and asset encumbrance
FIGURE 12.16(a) Stylised example collateral and encumbrance, Banks A and B
FIGURE 12.16(b) Stylised example collateral and encumbrance, Banks A and B
FIGURE 12.17 Bank FTP curve and other funding curves
FIGURE 12.18 Retail banking FTP regime
FIGURE 12.19 Asset and liabilities interaction
FIGURE 12.20 FTP operation illustration examples
FIGURE 12.21 Committed facility usage profile
FIGURE 12.22 USD Libor‐OIS spread 2002–2010
FIGURE 12.23 Funding breakdown UK banks average, 2007 and 2012
FIGURE 12.24 Hypothetical bank funding curve for an institution raising multiple different liability types
FIGURE 12.25 Deposit product analysis
FIGURE 12.26 Pros and cons of employing the different interest‐rate risk hedging instruments
Figure 3 Sample retail bank customer liabilities strategy
Figure 5 Retail bank performance outlook
FIGURE 12.27 Interest rate simulations
FIGURE 12.28 IRS MtM PV simulations
FIGURE 12.29 Cross Currency Swap Mark‐to‐Market PV simulations
FIGURE 12.30 Comparing IRS and XCY expected exposures
FIGURE 12.31 Expected swap exposure through life
FIGURE 12.32 Derivatives funding curve as secured funding COF
FIGURE 12.33 Uncollateralised derivatives net position FTP pricing
FIGURE 12.34 Customer IRS and hedging IRS
FIGURE 12.35 Factors related to xVAs and derivatives valuation
FIGURE 12.36 10‐year bond yields
FIGURE 12.37 Flattening yield curves
FIGURE 12.38 Discount function for positive and negative interest rates
FIGURE 12.39 Cash flow illustration and compliant LCR value – no cumulative liquidity shortfall bank
FIGURE 12.40 Cash flow illustration and compliant LCR value – cumulative liquidity shortfall bank
Chapter 13
Figure 15.2 Asset‐swap spread on screen ASW, France Telecom 3.625% 2015 bond, 9 December 2005
Figure 15.3 Cash–CDS basis for France Telecom, 9 December 2005
Figure 15.4 One‐year historical CDS–ASW spread, France Telecom, December 2005
Figure 15.5 France Telecom bond YAS page for asset‐swap and z‐spreads, 10 January 2006
Figure 16.11 Investment‐grade credit default swap levels, 2003–2004
Figure 16.12 Bloomberg screen WCDS showing extract of world CDS prices, as at 6 July 2006
Figure 16.31 Bloomberg screen HG showing implied price and market price for British Airways 10.875% 2008 bond, as at 11 December 2006
FIGURE 13.1 The Volatility of UK Interest Rates over time
FIGURE 13.2 Interest‐rate swap hedge
FIGURE 13.3 A Comparison between Sterling 1‐month and 3‐month Inter‐bank Lending Rates
FIGURE 13.4 Period 1 – Amortising Pay Fixed Swap hedge aligned to anticipated behavioural run‐off profile of a loan cohort
FIGURE 13.5 Period 2 – General level of interest rates falls so loans anticipated to repay quicker than original assumption
FIGURE 13.6 Period 2 – Balloon receive fixed swap is written to re‐align swap hedge to behavioural loan run‐off profile
FIGURE 13.7 Typical Timeline for a 5‐year Fixed Rate Mortgage Offer
Chapter 14
Figure 1.15 Centralised bank risk management, overseeing bank business lines.
Figure 1.16 Centralised bank risk management, breakdown into individual risk departments.
FIGURE 14.1 Managing the impact of Basel III
FIGURE 14.2 Group Treasury structure
FIGURE 14.3 Sample separation of duties
FIGURE 14.4 Treasury Risk target operating model
FIGURE 14.5 Areas benefitting from integrated risk management
FIGURE 14.6 Samples of workstreams as part of regulatory requirements
FIGURE 14.7 Sample of areas requiring cross‐departmental coordination and cooperation
FIGURE 14.8 Stress testing approaches
Chapter 15
Figure 15.5 Funding concentration policy, template example.
Chapter 16
Figure 17.5 Capital and liquidity trade‐off.
Figure 17.6 Recommended capital and liquidity position.
Figure 9.1 Bank Median Leverage Ratios, 2007–2009
Figure 9.2 Selected Bank Ratios of Total Assets to Tier 1 Capital and Trading Assets to Total Assets
Figure 9.4 Cross‐Border Bank Lending Volumes, 2000–2009
FIGURE 16.1 Leadership Commitment
FIGURE 16.2 Strategy‐setting cycle, pre‐crash
FIGURE 16.3 Strategy‐setting cycle, post‐crash
FIGURE 16.4 UK banks customer funding gap, 1997–2009
Chapter 17
Figure 18.1 Examples of board structure.
Figure 18.4 Standard organisation structure.
Figure 18.5 Board and management committee structure.
FIGURE 17.1 Board Governance Structures
FIGURE 17.2 Total banking leadership concept, Bluebird Treasury team 2013‐14
Chapter 18
FIGURE 18.1 Creating a value proposition that delivers concierge banking
FIGURE 18.2 Addressing customer issues: 1. Why can't I be treated as more than just a number?
FIGURE 18.3 Addressing customer issues: 2. Why should I settle for “computer says no” banking, or busy call centres where my query is simply passed down the conveyor belt?
FIGURE 18.4 Addressing customer issues: 3. Why should I need two years trading history to get a loan, when I've got a great business idea?
FIGURE 18.5 High level acquisition strategy
FIGURE 18.6 Sample deposits gathering strategy
FIGURE 18.7 Sample loan growth strategy
Chapter 19
FIGURE 19.1 Northern Rock funding types 1998–2007
FIGURE 19.2 Northern Rock CDS price history Apr–Sep 2007
FIGURE 19.3 Proposed ALM report in table and graph formats
FIGURE 19.4 Business line funding usage
FIGURE 19.5 CBD ALCO governance structure
FIGURE 19.6 UK commercial bank IRRBB reporting
FIGURE 19.7 Bank IRRBB hedge structure
FIGURE 19.8 Deposit and product type split
FIGURE 19.9 GBP Type A Balances
Guide
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E1
The Moorad Choudhry Anthology
Past, Present and Future Principles of Banking and Finance
+ Website
MOORAD CHOUDHRY
