Asset & Liability Management for Banks in Africa

Overview
Many banks have assigned Asset and Liability Management to their Treasury department, which
seems to make sense as financial competences are in this department. But leads to a potential
conflict of interest as the treasury department is a profit certain while ALM is a risk management
unit. It is thus necessary to start the training with a discussion of the definitions, roles and
responsibilities of the business units, including treasury, versus the risk management units,
including ALM. We also need to discuss the differences in treatment of the Banking Book by
opposition to the Trading Book as this is key in the regulatory models imposed by the Basel Acord
for market risk.

The financial risk management techniques are of course independent of the organisational
structure and this is what need to focus on. The main risk domains we will focus on are the
Interest Rate Risk (IRR), and Liquidity Risks, but will also discuss Foreign Exchange Risk. We will
cover all the main risk quantification models from gap analysis to Value at Risk (VaR) and discuss
what is appropriate for the local markets. We will of course draw parallels with the models
recommended by the Basel Accord, known as Basel 2 and 3, knowing that many markets in Africa
are not imposing all the Basel 3 rules. But this training does not focus on compliance and
reporting but on risk management as determined and defined by each bank’s business models,
policies and strategies.

The risk quantification models are mathematical and statistical. From experience we know that
they must be illustrated through case studies that highlight the consequences of ALM strategies.
To achieve this we will use a computer-based bank ALM simulation model. The simulation allows
participants to make ALM decisions to manage exposures (underwrite and hedge) under capital
adequacy constraints (Basel 3) and management constraints (creating shareholder value). They
will have risk limits to respect and be dependant of market volatility. The simulation is actually
very close to a real-life management challenge It will increase the understanding of theoretical
concepts and more importantly will allow participants to understand their role in making ALM
decision within an ALCO.
Training Objectives
Emerging Financial Markets (EFM) create serious challenges for banks. By opposition to
advanced financial markets, the EFMs do not have deep financial markets that cover the whole
product spectrum and all maturities. This generates specific challenges for banks that want to
comply to compliance constraints while proposing added value products to their corporate and
retail customers.

Our objective is to review principally interest rate risks, and liquidity risks and to a lesser degree
FOREX risks. Participants will be able to:

• Quantify the implicit and explicit risks underwritten by the banks, through there
commercial activities as well as through their proprietary trading and investment
activities.
• Discuss the techniques to develop local currency Yield Curves.
• Describe the financial risk components of the banking products and how to price these
through Fund Transfer Pricing (FTP).
• Define hedging techniques using multiple hedging products on the cash and derivative
markets, and through internal hedging structures such as delta hedging.
• Discuss ALM reporting for internal management purposes and for compliance
reporting (Basel 3).
• Review the ALM impact on the global bank strategy and on product management
opportunities.
• Review the convergence between interest rate risk and foreign exchange risk and
discuss how to integrate forex in the ALM framework.

Through this training on Asset & Liability Management organised by TIOB and Pragmatic Skills
Academy, participants will gain a deep understanding of how to maximize the performance of
the bank under asset and liability risk management constraint. We will discuss key success
factors and challenges and suggest tools and methodologies to enhance the effectiveness of
the bank ALM framework.

The objectives of the training are simple: allow managers to participate actively in ALCO
meeting, understand the requirements and challenges of making risk management decisions
and realising the consequences of these decisions. We want participants to be able to enhance
their productivity and impact in risk management immediately at the completion of the
training.
Who should attend?
The course applies to senior bank managers that need to understand the impact of ALM to their
strategies and performance, and how ALM will influence Fund Transfer Prising (FTP), the
banking products and their client satisfaction. The training will also be of huge importance to
ALM managers as well as product managers. Financial and management accounting staff will
gain essential understanding required to optimise budget and equity management. Good
existing banking competencies are required.

• Executive, general and senior managers.

• Business unit managers and heads of regional businesses and branches.
• ALM managers and Enterprise Risk Managers (ERM) including credit risk and
compliance managers.
• Product Managers and Marketing managers.
• Financial and Management Accounting managers, internal auditors, and experts
responsible for corporate strategy and planning.
• Banking and strategy consultants.
• IT developing teams involved in risk management tools development.
• Regulators and Central bankers.

Training type and methodology

Usually, the training is a classroom training of 5 full days. We have transformed it into a 5-day
distance learning training, reserving some 40 to 50% of the time to the practical ALM
simulation. After most of the modules the participants will be required to work in groups in the
simulation defining risk policies and strategies as well as implementing the strategies through
risk underwriting and hedging decisions.

We have organised the concepts into 17 modules of 45 minutes each, which are followed by
exercises and the simulation case study, each of these needing 30 to 60 minutes to complete.

Duration
The modules and the case study work sessions are equivalent to a 5 full day classroom training.
Content Description
Part 1
Introduction
Module 1
The Financial Markets and base concepts
The yield curve (including yield curve calculations principals)
Interest rate definitions and time value of money calculations
Financial product economic and accounting valuation principals (accrual,
amortised costs, and fair value)

Module 2 ALM in the bank structure

ALM organisational issues, policies, and strategies
Responsibilities and competencies
Definition of ALM risks (interest rates, liquidity, Forex, commodities, equity)
ALM vs. market risk; the trading and the investment book versus the banking book

Part 2
Interest Rate Risk (IRR) management
Module 3
Financial contract definitions and cash flow analysis for IRR
Maturity contracts and non-maturity contracts
Fixed, variable, floating interest rate prices
Symmetrical and non-symmetrical cash and derivative contracts (implicit and
explicit options)

Module 4 The profitability sensitivities analysis

Interest rate gap ((static, dynamic, marginal, cumulative, contractual,
behavioural…) and rate shock sensitivities
Policies, limits, and performance metrics

Module 5 The value sensitivities deterministic analysis

Bond pricing principals and application of financial valuation in ALM
The Basis Point Value sensitivity analysis
Duration, Modified Duration, Convexity, Time Decay analysis
Policies, limits and performance metrics
Module 6 The value sensitivities, statistical and probabilistic approach
Option Pricing theory and valuation through Delta, Gamma, Vega, Rho and Theta
measures (high level overview)
Value at Risk definition and principals
VaR calculation methodologies
Policies, limits and performance metrics

Module 7 The portfolio theory approach

Variance and covariance analytics and risk portfolio optimisation strategies and
metrics
Risk concentration versus diversification

Module 8 Assuming and management of IRR

Economic Equity budgeting and allocation
Risk Return optimisation
Hedging interest rate risks policies and methodologies
Commercial strategies
Cash and Derivative markets and financial engineering

Part 3
Liquidity Risk Management
Module 9
Financial contract definitions and cash flow analysis the liquidity approach
Maturity contracts and non-maturity contracts
Behavioural variables modelling

Module 10 The Gap assessment

Liquidity gap (static, dynamic, marginal, cumulative, contractual, behavioural…)
Liquidity stress testing
Policies, limits, and performance metrics

Module 11 The Ratio assessments

Traditional ratios
Use and limitations

Module 12 Basel 3 ratios: LCR

Policies, limits, and performance metrics

Module 13 Basel 3 ratio: NSFR

Other Base 3 constraints
Policies, limits, and performance metrics
Module 14 Assuming and managing Liquidity risk:
LR appetite and strategy determination
LR hedging
Commercial strategy implications
Contingency Funding Plan (CFP)
Monitoring and reporting Liquidity Risks

Part 4
Other ALM issues and considerations
Module 15
FOREX Risks, Equity and Commodity risks

Modules 16 Integrating ALM in the day-to-day management of the bank

Risk Transfer Pricing (funds, liquidity, credit risk…) pricing models
Product development (retail, corporate)

Module 17 ALM solutions implementations

Revisit ALM policies and procedure for the bank
Integrate with Basel Compliance
Develop an appropriate ALM technical solution

Conclusions and debriefing

 Course Director: Clive Wykes
Clive graduated from the University of Louvain (UCL)
in Belgium, with a Masters in Applied Economic
Sciences.

From 1973 to 1991 he developed his career in

banking with American Express and Chase
Manhattan Bank. During those years he covered
many areas of banking of which credit and
marketing, risk management, product development and management, budgeting / MIS, and
strategic planning as well as general management. He was exposed to local and international
markets in Retail Banking and Corporate Banking (SMEs, large global corporations, and
Institutions). He had management responsibilities at departmental level and General
Management responsibilities included CEO - Country Manager Chase Belgium and EMEA Sales
Executive Risk Management Products.

In 1991, he founded a Management Consultancy firm, PI Consulting SA Belgium, and developed

his business with large European financial institutions. In 2008 he founded BC&T Ltd in Mauritius
to take over the consulting and training activities of PI Consulting SA, Belgium and focused
primarily on emerging countries and banks, while maintaining his activities in Europe, the Middle
East and Asia. He has had consulting mandates with banks in Europe (BNPP, AXA, Barclays, Soc.
Gen), in Africa (FNB, BDEAC, BBS, Zanaco, FBZ…) and in Asia (Bank of China, Shinhan Bank…). He
has collaborated with large solution vendors (Teradata, CSC, SAS…) in risk management,
compliance and IFRS solution design as well as client valuation and management solutions. A
substantial part of the consulting with solutions vendors and integrators was for retail banking
solutions and retail bank restructuring.

As a banker and a consultant Clive has had many assignments directly related to Distressed Credit
Management as Workout Officer of major Corporate and Residential Real Estate exposures, but
also for multinational industrial and trading exposures. As a consultant he has developed the
credit policies including NPL policies for banks in Africa and developed Early Warning Signal and
Event Based Credit Warning Systems for banks.

Clive has worked in over 65 countries around the world, with banks and other financial
institutions either as project manager in management consulting assignments or as training
course director.