Mauritius Banking Association Treasury & Risk Management for Depository Institutions in the New Regulatory Environment 5 Day Programme Port Louis, Mauritius
WORKSHOP OUTLINE COURSE BACKGROUND The banking crisis of 2008 has spurned a raft of regulatory responses designed to reduce systemic risk in the system and diminish the likelihood of insolvency at the institutional level. The ramifications of these changes will be wide ranging, and effective balance sheet management will be imperative to deliver shareholder value. The course outlines the new regulatory framework in which depository institutions will now operate, explaining the rational for the changes, and the consequences for the banks in how they fund the balance sheet, mitigate credit exposures, and manage their interest rate exposures. Key Learning Points How banks operate and the risk they are exposed to Causes of the 2008 financial collapse The regulatory response explained Implications for deposit taking institutions in the new environment - Managing the liability side of the balance sheet: Funding the bank - Managing the asset side of the balance sheet: Mitigating credit risk Maintaining a liquidity buffer Off-loading the risk: securitisation Asset & liability management in the new environment - Interest rate and liquidity GAP analysis - Transfer pricing and economic value - Managing interest rate risk Understanding the tools for minimising interest rate risk - FRA s and swaps explained Measuring interest rate risk in the trading book - VAR explained Funding liquidity risk Common derivative instruments used in treasury management Course Training Method The programme will use traditional and well tried techniques, lectures and worked examples based on real-life trades illustrating in detail how the financial market works and how seemingly disparate markets inter-connect with one another. The course is designed to explain complex issues in a straightforward manner, making the course accessible to those with limited experience and exposure to the financial markets, without recourse to dumbing-down the issues and thereby alienating more experienced professionals. 2
Who should attend? This course has been prepared for those professionals who perform a wide range of functions involved in the raising of capital for corporate clients from external investors and other stakeholders. The programme will be of particular interest and benefit to those involved in the following job functions: Corporate directors and treasury staff Corporate finance executives Treasury executives Research analysts Risk managers Back office settlement staff Accountants and auditors Legal staff AGENDA Day One: Providing the Context: Treasury Overview The Business Model & the Role of Treasury within the Bank Banking entities and activities Depository institutions v investment and universal banks The scope of bank activities Banking book v trading book Understanding the distinct business models of the various types Analysing the financial statements The balance sheet Profit and loss statement The role of treasury within the organisation Safeguarding the bank s liquidity Safeguarding the bank s solvency Creating shareholder value Shareholder return-on-equity (ROE) The drivers of ROE Profit centre management Risk adjusted return on capital (RAROC) v Economic Value Added (EVA) 3
Session 2 Identification of the Principal Risk Factors facing Banks: A Balance Sheet Approach Wholesale & retail credit risk Types of credit risk Liquidity (funding) risk Interest rate risk Mismatch risk Market liquidity (market price risk) Market risk Capital risk Operational risk Session 3 Managing the Risks: The Regulatory Response Brief overview of the contributing factors that caused the banking crisis Ramifications of the crisis Managing the risk: high level analysis and the regulatory response: Strengthening the global capital framework The three pillars of Basel II & III explained Raising the quality, consistency and transparency of the capital base Enhancing risk coverage Supplementing the risk-based capital requirement with a leverage ratio Reducing pro-cyclicality and promoting countercyclical buffers Introducing a global liquidity standard Liquidity Coverage Ratio Net Stable Funding Ratio Monitoring tools 4
Day Two: The Impact of the New Regulatory Approach on Financial Institutions Funding the Bank in the New Regulatory Environment New regulatory definitions of capital What constitutes Tier 1 capital? Distinguishing between Core Equity Tier 1 capital and Additional Tier 1 capital Defining Tier 2 capital Limits and minima in each capital class Funding the bank balance sheet Hybrid capital in the new environment Contingent convertible securities Session 2 Managing the Asset Side of the Balance Sheet: Risk Weighted Assets Defining the trading and banking books The standardised approach to credit risk in the banking book The internal ratings based approach (IRB Approach) Expected losses (EL) v unexpected losses (UL) Probability of default (PD), loss given default (LGD) and exposure at default (EAD) explained Minimum requirements for IRB Credit mitigation in the new environment Collateral: Funded credit risk mitigation in the banking book Unfunded credit risk mitigation in the banking book: Guarantees and credit derivatives Session 3 Funding & Balance Sheet Management using Securitisation Motivation The economics of securitisation Covered bond v mortgage backed securities Collateralised debt obligations New proposals for regulatory capital 5
Day Three: Asset & Liability Management (1):Measuring & Managing the Banking Book Interest Rate Risk Effective Loan Pricing Net interest income as a margin on deposits and loans Break-even pricing and the equity spread The role of economic capital Economic capital allocation Loan pricing incorporating credit risk and bad-debt provisions Session 2 Funds Transfer Pricing & the Management of ALM Risks Problems with traditional approaches to transfer pricing Matched funds transfer pricing Transfer pricing for intermediate maturity instruments Efficient allocation of capital Session 3 Controlling Interest Rate Risk in the Banking Book (1) Measuring the interest rate risk The role of the accounting methodology on the interest rate risk exposure Understanding the interest rate gap Creating and interpreting the gap report Marginal interest rate gaps Reporting interest rate risk Limitations to Gap Analysis & Possible Solutions Problem with gap analysis Using simulations 6
Session 4 Controlling Interest Rate Risk in the Banking Book (2) Bank solvency and the economic value of equity The aggregation of interest rate risk on the banking book Using derivative products to hedge interest rate risk What about trading book interest rate risk? Day Four:Asset & Liability Management (1):Liquidity Risk Measurement & Management Measuring Interest Rate Risk in the Trading Book Definition of VAR What does VAR miss: Shortfall risk VAR and capital The importance of coherent risk measures How do we aggregate risks Approaches to back-testing Overview of risk methodologies Models based on distributional assumptions Parametric methods Monte Carlo simulation Calculating VAR using empirical distributions: the historical simulation approach Regulatory capital requirements for the trading book: 2016 provisions explained Application to derivative instruments Session 2 Funding-Liquidity Risk in ALM The liquidity policy statement Measurement of liquidity risk Expected funding requirements Unusual funding requirements Crisis funding requirements and economic capital 7
Issues for determining the liquidity gap time profile The new regulatory framework Liquidity risk management Session 3 The Anatomy of a Bank Liquidity Crisis The business model re-examined Day Five: Common Derivative Instruments for Managing Treasury Risk Money Market Derivatives: FRA Deriving a forward interest rate using depos The forward yield curve What has changed since the financial crisis Forward Rate Agreements Defining the terms and cash flow dates Using the settlement formula to lock-in a forward borrow/lend rate Marking-to-market a FRA Hedging with FRAs, hedged rates, imperfections Creating synthetic loans & deposits with FRA s Case study: Hedging cash exposures with FRAs and calculating hedged costs of borrowing or lending Session 2 Money Market Swaps Definition & mechanics of swaps Overnight Index Swaps (OIS): Mechanics Creating synthetic interbank borrowing/lending exposures Importance following the financial crisis The function of interest rate swaps Types of swap including basis swaps Currency swaps v FX swaps Case study: Calculating the cash flows of a OIS 8