This document discusses asset liability management (ALM) frameworks and concepts. It covers key dimensions of ALM including interest rates, maturities, funding, liquidity, and the relationship between liabilities and assets. It also outlines ALM frameworks including business models, risk analysis, capital and financial models, liquidity models, and simulation. Additional sections provide an ALM cheat sheet and discuss liquidity risk, stress testing, and examples of liquidity crises at Bear Stearns and Lehman Brothers.

1. Asset Liability Management
Jawwad Ahmed Farid

2. ALM at a glance
Interest
Repricing
Rates
Maturities Funding
Value/
Income

3. Dimensions
Funding
Liquidity
Maturity

4. ALM
Equity Liabilities Assets
Re-price Re-price
Liabilities Assets

5. Risk - Return
Metric or Change in Change in
Target Interest Market
Account Income Value
Change in
Driver Interest
Rate
Balance Income
Setting Sheet Statement

6. ALM Framework - I
Business
Model
Stress Risk
Tests Analysis
Capital Financial
Model Model
Liquidity
Model

7. ALM – Framework - II
Value at Portfolio
Simulation ALM Capital
Risk Review

8. Building the ALM model
Balance
P&L Valuation
Sheet
Calculation Interest Rate
ALM Reports
Engine Generator
Presentation

9. ALM Cheat Sheet
Sigma
Duration
Convexity
Asset Sensitive
Liability Sensitive
Value at Risk
Hedging Tools

10. ALM Cheat Sheet
See link above for ALM convention & FAQ’s
• R.P  Reprice
• As  Assets
• L  Liabilities
• NII  Net Interest Income (PnL)
• MVE  Market Value of Equity (Value)
• EaR  Earning at Risk (NII with VaR)
• Asset Sensitive
• Liability Sensitive

11. ALM Cheat Sheet

12. Liquidity Risk & Stress Testing

13. Name Crisis
Change in market Operational Asset Regulatory Accounting
conditions Loss related Loss scandal Scandal

14. Liquidity Crisis
Liquidity
Name
driven
Crisis
Asset Sale
Asset and
Margin
share
and
price
Collateral
under
Calls
pressure
Counterpar
ty Limits Rating
Withdrawn Downgrad
or e
restricted

15. Cash Generation
• Repurchase agreements
• Discount window
Asset Sales • Outright sale at depressed prices
• Off market settlement for netting off liabilities
• Secured Term loans
Cash • Equity Injection
• Asset Swap for Cash
Generation • Regulatory driven cash injection or take over
• Realignment and restructuring of resources
Cash • Discontinued operations
• Limit management
conservation • Centralization of cash management

16. Bear Stearns
Under 90 days
Crisis in full bloom
20th December
2007 – Q4 Loss
JP Morgan
Takeover 16th
March 2008 @ 2$
a share

17. Lehman
9th June: $45 billion in liquidity, 20% reduction risky assets, leverage from 31:1 to 25:1.
Survived March Bear fallout. Raised US$ 10 billion through capital issues in April/June
Under 30 days
Crisis in full bloom
19th August 2008
– Q3 Loss & write
downs
Lehman
Bankruptcy Filing
15th Sep 2008

19. Jawwad Ahmed Farid
alchemya.com
FinanceTrainingCourse.com
jawwad@alchemya.com