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by Steen Blaafalk, Moorad Choudhry
An Introduction to Banking, 2nd Edition
COVER
TITLE PAGE
FOREWORD
PREFACE
LAYOUT OF THE BOOK
PREFACE TO THE FIRST EDITION
ACKNOWLEDGEMENTS
ABOUT THE AUTHOR
PART I: Bank Business and the Markets
Chapter 1: BANK BUSINESS AND CAPITAL
THE BASIC BANK BUSINESS MODEL
BANKING BUSINESS
SCOPE OF BANKING ACTIVITIES
BANKING PRODUCTS
CAPITAL MARKETS
FINANCIAL STATEMENTS AND RATIOS
BIBLIOGRAPHY
NOTES
Chapter 2: CUSTOMER SERVICES AND MARKETING FOR BANK PRODUCTS
MARKETING FINANCIAL SERVICES
CUSTOMER SERVICE
PRODUCT DEVELOPMENT
PRODUCT PRICING
CONCLUSION
NOTES
Chapter 3: CREDIT ASSESSMENT AND MANAGING CREDIT RISK
PART 1
CREDIT PROCESS
LOAN ORIGINATION PROCESS STANDARDS
QUALITATIVE FACTORS: RETAIL AND NON‐RETAIL EXPOSURES
INTERNAL RATINGS
COUNTERPARTY RISK PARAMETERS
DEFAULTS EVENTS AND MEASURES
PRODUCT CREDIT RISK MEASUREMENT
CREDIT RISK TERMINOLOGY
MODEL DEVELOPMENT
RISK MONITORING AND MODEL VALIDATION
TRADING BOOK CREDIT EXPOSURES
PART 2
CONCLUSIONS
NOTE
Chapter 4: THE MONEY MARKETS
INTRODUCTION
SECURITIES QUOTED ON A YIELD BASIS
SECURITIES QUOTED ON A DISCOUNT BASIS
COMMERCIAL PAPER
REPO
THE CLASSIC REPO
REPO COLLATERAL
LEGAL TREATMENT
MARGIN
FOREIGN EXCHANGE
FX BALANCE SHEET HEDGING
CURRENCIES USING MONEY MARKET YEAR BASE OF 365 DAYS
NOTES
Chapter 5: THE YIELD CURVE
IMPORTANCE OF THE YIELD CURVE
USING THE YIELD CURVE
YIELD‐TO‐MATURITY YIELD CURVE
ANALYSING AND INTERPRETING THE YIELD CURVE
THEORIES OF THE YIELD CURVE
THE ZERO‐COUPON YIELD CURVE
CONSTRUCTING THE BANK'S INTERNAL YIELD CURVE
CALCULATION ILLUSTRATIONS
UNDERSTANDING FORWARD RATES
SONIA YIELD CURVE
CONCLUSIONS
APPENDIX
REFERENCES
APPENDIX
BIBLIOGRAPHY
NOTES
Chapter 6: INTRODUCTION TO MONEY MARKET DEALING AND HEDGING
MONEY MARKET APPROACH
ALM IN A NEGATIVE YIELD CURVE ENVIRONMENT
CREDIT INTERMEDIATION BY THE REPO DESK
INTEREST‐RATE HEDGING TOOLS
BIBLIOGRAPHY
NOTES
PART II: Asset–Liability Management and Liquidity Risk
Chapter 7: BANK ASSET AND LIABILITY MANAGEMENT I
BASIC CONCEPTS
LIQUIDITY GAP
MANAGING LIQUIDITY
LIQUIDITY MANAGEMENT
THE ALM DESK
CRITIQUE OF THE TRADITIONAL APPROACH TO ALM
STRATEGIC ALM
CONCLUSIONS
BIBLIOGRAPHY
NOTES
Chapter 8: ASSET AND LIABILITY MANAGEMENT II: THE ALCO
TRADITIONAL ALCO MISSION
ALCO GOVERNANCE BEST‐PRACTICE PRINCIPLES
CONCLUSIONS
APPENDIX 8.1: ALCO RECOMMENDED TERMS OF REFERENCE
NOTES
Chapter 9: BANK LIQUIDITY RISK MANAGEMENT I
BEST‐PRACTICE LIQUIDITY RISK MANAGEMENT FRAMEWORK
THE LIQUIDITY POLICY STATEMENT
CONCLUSION
NOTE
Chapter 10: LIQUIDITY RISK MANAGEMENT II: BASEL III LIQUIDITY, LIABILITIES STRATEGY, STRESS TESTING, COLLATERAL MANAGEMENT AND THE HQLA
BASEL III LIQUIDITY METRICS
OPTIMUM LIABILITIES STRATEGY AND MANAGING THE HIGH‐QUALITY LIQUID ASSETS (HQLA) PORTFOLIO
THE LIQUID ASSET BUFFER
LIQUIDITY REPORTING, STRESS TESTING, ILAAP, AND ASSET ENCUMBRANCE POLICY
LIQUIDITY STRESS TESTING
INDIVIDUAL LIQUIDITY ADEQUACY ASSESSMENT PROCESS
INTRA‐DAY LIQUIDITY RISK
ASSET ENCUMBRANCE
COLLATERAL FUNDING MANAGEMENT, FVA, AND CENTRAL CLEARING FOR OTC DERIVATIVES
CONCLUSIONS
NOTES
Chapter 11: BUSINESS BEST‐PRACTICE BANK INTERNAL FUNDS TRANSFER PRICING POLICY
BACKGROUND
SETTING THE BANK POLICY STANDARD
THE TERM LIQUIDITY PREMIUM
TEMPLATE FTP REGIMES
CONCLUSIONS
Chapter 12: NET INTEREST INCOME (NII), NET INTEREST MARGIN (NIM) AND THE MANAGEMENT OF INTEREST‐RATE RISK IN THE BANKING BOOK
NET INTEREST INCOME
NET INTEREST MARGIN
INTEREST‐RATE RISK IN THE BANKING BOOK
SIMULATION ANALYSIS
THE MANAGEMENT OF GAP RISK
THE MANAGEMENT OF BASIS AND OPTION RISKS
THE MANAGEMENT OF PREPAYMENT RISK
THE MANAGEMENT OF PIPELINE RISK
THE MANAGEMENT OF CAP AND FLOOR RISK
BASEL COMMITTEE: HIGH‐LEVEL PRINCIPLES FOR INTEREST‐RATE RISK IN THE BANKING BOOK
CONCLUSIONS
NOTE
Chapter 13: SECURITISATION MECHANICS FOR BALANCE SHEET MANAGEMENT
THE PARTIES TO A SECURITISATION
STRUCTURAL FEATURES OF ABS
PRACTICAL ISSUES WITH ORIGINATING AN OWN‐ASSET SECURITISATION TRANSACTION
SUMMARY AND CONCLUSIONS
BIBLIOGRAPHY
NOTE
PART III: Strategy, Regulatory Capital and Case Studies
Chapter 14: STRATEGY SETTING
THE STRATEGIC PLANNING PROCESS
CONSIDERATIONS IN THE DEVELOPMENT OF STRATEGY
STRATEGY AND THE BANK BUSINESS MODEL
EVALUATION OF THE STRATEGIC PLAN
CONCLUSION
BIBLIOGRAPHY
Chapter 15: BANK REGULATORY CAPITAL, BASEL RULES AND ICAAP
THE BANKING MODEL AND CAPITAL
KEY CAPITAL CONSIDERATIONS
CAPITAL MANAGEMENT POLICY
CAPITAL ADEQUACY AND STRESS TESTING
ICAAP PROCESS – WORKED EXAMPLE OF PRESENTATION
STRESS TESTING
DIVIDEND POLICY
CASE STUDY: INTERNAL CAPITAL ASSESSMENT
CONCLUSIONS
BIBLIOGRAPHY
NOTES
Chapter 16: MANAGING OPERATIONAL RISK
OPERATIONAL RISK OVERVIEW
CONDUCT RISK
OPERATIONAL RISK MEASUREMENT
OPERATIONAL RISK MEASUREMENT CONCEPTS
BASEL OPERATIONAL RISK FRAMEWORK
STANDARDISED APPROACH
QUALITATIVE INPUT AND MODEL VALIDATION
OPERATIONAL RISK MANAGEMENT FRAMEWORK
CONCLUSIONS
Chapter 17: ADVICE AND PROBLEM SOLVING: CASE STUDIES
HOW TO STUDY THIS CHAPTER
Appendix A: FINANCIAL MARKETS ARITHMETIC
INTEREST: PRESENT AND FUTURE VALUE
MULTIPLE CASH FLOWS
CORPORATE FINANCE PROJECT APPRAISAL
INTERPOLATION AND EXTRAPOLATION
NOTE
Appendix B: ABBREVIATIONS AND ACRONYMS
INDEX
END USER LICENSE AGREEMENT
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Prev
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COVER
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Next Chapter
TITLE PAGE
Table of Contents
COVER
TITLE PAGE
FOREWORD
PREFACE
LAYOUT OF THE BOOK
PREFACE TO THE FIRST EDITION
ACKNOWLEDGEMENTS
ABOUT THE AUTHOR
PART I: Bank Business and the Markets
Chapter 1: BANK BUSINESS AND CAPITAL
THE BASIC BANK BUSINESS MODEL
BANKING BUSINESS
SCOPE OF BANKING ACTIVITIES
BANKING PRODUCTS
CAPITAL MARKETS
FINANCIAL STATEMENTS AND RATIOS
BIBLIOGRAPHY
NOTES
Chapter 2: CUSTOMER SERVICES AND MARKETING FOR BANK PRODUCTS
MARKETING FINANCIAL SERVICES
CUSTOMER SERVICE
PRODUCT DEVELOPMENT
PRODUCT PRICING
CONCLUSION
NOTES
Chapter 3: CREDIT ASSESSMENT AND MANAGING CREDIT RISK
PART 1
CREDIT PROCESS
LOAN ORIGINATION PROCESS STANDARDS
QUALITATIVE FACTORS: RETAIL AND NON‐RETAIL EXPOSURES
INTERNAL RATINGS
COUNTERPARTY RISK PARAMETERS
DEFAULTS EVENTS AND MEASURES
PRODUCT CREDIT RISK MEASUREMENT
CREDIT RISK TERMINOLOGY
MODEL DEVELOPMENT
RISK MONITORING AND MODEL VALIDATION
TRADING BOOK CREDIT EXPOSURES
PART 2
CONCLUSIONS
NOTE
Chapter 4: THE MONEY MARKETS
INTRODUCTION
SECURITIES QUOTED ON A YIELD BASIS
SECURITIES QUOTED ON A DISCOUNT BASIS
COMMERCIAL PAPER
REPO
THE CLASSIC REPO
REPO COLLATERAL
LEGAL TREATMENT
MARGIN
FOREIGN EXCHANGE
FX BALANCE SHEET HEDGING
CURRENCIES USING MONEY MARKET YEAR BASE OF 365 DAYS
NOTES
Chapter 5: THE YIELD CURVE
IMPORTANCE OF THE YIELD CURVE
USING THE YIELD CURVE
YIELD‐TO‐MATURITY YIELD CURVE
ANALYSING AND INTERPRETING THE YIELD CURVE
THEORIES OF THE YIELD CURVE
THE ZERO‐COUPON YIELD CURVE
CONSTRUCTING THE BANK'S INTERNAL YIELD CURVE
CALCULATION ILLUSTRATIONS
UNDERSTANDING FORWARD RATES
SONIA YIELD CURVE
CONCLUSIONS
APPENDIX
REFERENCES
APPENDIX
BIBLIOGRAPHY
NOTES
Chapter 6: INTRODUCTION TO MONEY MARKET DEALING AND HEDGING
MONEY MARKET APPROACH
ALM IN A NEGATIVE YIELD CURVE ENVIRONMENT
CREDIT INTERMEDIATION BY THE REPO DESK
INTEREST‐RATE HEDGING TOOLS
BIBLIOGRAPHY
NOTES
PART II: Asset–Liability Management and Liquidity Risk
Chapter 7: BANK ASSET AND LIABILITY MANAGEMENT I
BASIC CONCEPTS
LIQUIDITY GAP
MANAGING LIQUIDITY
LIQUIDITY MANAGEMENT
THE ALM DESK
CRITIQUE OF THE TRADITIONAL APPROACH TO ALM
STRATEGIC ALM
CONCLUSIONS
BIBLIOGRAPHY
NOTES
Chapter 8: ASSET AND LIABILITY MANAGEMENT II: THE ALCO
TRADITIONAL ALCO MISSION
ALCO GOVERNANCE BEST‐PRACTICE PRINCIPLES
CONCLUSIONS
APPENDIX 8.1:
ALCO RECOMMENDED TERMS OF REFERENCE
NOTES
Chapter 9: BANK LIQUIDITY RISK MANAGEMENT I
BEST‐PRACTICE LIQUIDITY RISK MANAGEMENT FRAMEWORK
THE LIQUIDITY POLICY STATEMENT
CONCLUSION
NOTE
Chapter 10: LIQUIDITY RISK MANAGEMENT II: BASEL III LIQUIDITY, LIABILITIES STRATEGY, STRESS TESTING, COLLATERAL MANAGEMENT AND THE HQLA
BASEL III LIQUIDITY METRICS
OPTIMUM LIABILITIES STRATEGY AND MANAGING THE HIGH‐QUALITY LIQUID ASSETS (HQLA) PORTFOLIO
THE LIQUID ASSET BUFFER
LIQUIDITY REPORTING, STRESS TESTING, ILAAP, AND ASSET ENCUMBRANCE POLICY
LIQUIDITY STRESS TESTING
INDIVIDUAL LIQUIDITY ADEQUACY ASSESSMENT PROCESS
INTRA‐DAY LIQUIDITY RISK
ASSET ENCUMBRANCE
COLLATERAL FUNDING MANAGEMENT, FVA, AND CENTRAL CLEARING FOR OTC DERIVATIVES
CONCLUSIONS
NOTES
Chapter 11: BUSINESS BEST‐PRACTICE BANK INTERNAL FUNDS TRANSFER PRICING POLICY
BACKGROUND
SETTING THE BANK POLICY STANDARD
THE TERM LIQUIDITY PREMIUM
TEMPLATE FTP REGIMES
CONCLUSIONS
Chapter 12: NET INTEREST INCOME (NII), NET INTEREST MARGIN (NIM) AND THE MANAGEMENT OF INTEREST‐RATE RISK IN THE BANKING BOOK
NET INTEREST INCOME
NET INTEREST MARGIN
INTEREST‐RATE RISK IN THE BANKING BOOK
SIMULATION ANALYSIS
THE MANAGEMENT OF GAP RISK
THE MANAGEMENT OF BASIS AND OPTION RISKS
THE MANAGEMENT OF PREPAYMENT RISK
THE MANAGEMENT OF PIPELINE RISK
THE MANAGEMENT OF CAP AND FLOOR RISK
BASEL COMMITTEE: HIGH‐LEVEL PRINCIPLES FOR INTEREST‐RATE RISK IN THE BANKING BOOK
CONCLUSIONS
NOTE
Chapter 13: SECURITISATION MECHANICS FOR BALANCE SHEET MANAGEMENT
THE PARTIES TO A SECURITISATION
STRUCTURAL FEATURES OF ABS
PRACTICAL ISSUES WITH ORIGINATING AN OWN‐ASSET SECURITISATION TRANSACTION
SUMMARY AND CONCLUSIONS
BIBLIOGRAPHY
NOTE
PART III: Strategy, Regulatory Capital and Case Studies
Chapter 14: STRATEGY SETTING
THE STRATEGIC PLANNING PROCESS
CONSIDERATIONS IN THE DEVELOPMENT OF STRATEGY
STRATEGY AND THE BANK BUSINESS MODEL
EVALUATION OF THE STRATEGIC PLAN
CONCLUSION
BIBLIOGRAPHY
Chapter 15: BANK REGULATORY CAPITAL, BASEL RULES AND ICAAP
THE BANKING MODEL AND CAPITAL
KEY CAPITAL CONSIDERATIONS
CAPITAL MANAGEMENT POLICY
CAPITAL ADEQUACY AND STRESS TESTING
ICAAP PROCESS – WORKED EXAMPLE OF PRESENTATION
STRESS TESTING
DIVIDEND POLICY
CASE STUDY: INTERNAL CAPITAL ASSESSMENT
CONCLUSIONS
BIBLIOGRAPHY
NOTES
Chapter 16: MANAGING OPERATIONAL RISK
OPERATIONAL RISK OVERVIEW
CONDUCT RISK
OPERATIONAL RISK MEASUREMENT
OPERATIONAL RISK MEASUREMENT CONCEPTS
BASEL OPERATIONAL RISK FRAMEWORK
STANDARDISED APPROACH
QUALITATIVE INPUT AND MODEL VALIDATION
OPERATIONAL RISK MANAGEMENT FRAMEWORK
CONCLUSIONS
Chapter 17: ADVICE AND PROBLEM SOLVING: CASE STUDIES
HOW TO STUDY THIS CHAPTER
Appendix A: FINANCIAL MARKETS ARITHMETIC
INTEREST: PRESENT AND FUTURE VALUE
MULTIPLE CASH FLOWS
CORPORATE FINANCE PROJECT APPRAISAL
INTERPOLATION AND EXTRAPOLATION
NOTE
Appendix B: ABBREVIATIONS AND ACRONYMS
INDEX
END USER LICENSE AGREEMENT
List of Tables
Chapter 1
Table 1.1 Selected banking activities and services
Table 1.2 Bank analysis ratios for capital strength
Table 1.3 Typical priorities of corporate bonds and loans of investment grade and sub‐investment‐grade borrowers
Table 1.4 Components of a bank balance sheet
Table 1.5 Components of bank income statement, typical structure for retail bank
Table 1.6 Bank cost–income ratios
Chapter 2
Table 2.1 Vanilla commercial banking products
Chapter 3
Table 3.1 Formulae and description for the key ratios mentioned above
Table 3.2 Comparison of RARoC vs EVA
Chapter 4
Table 4.1 Comparison of US CP and eurocommercial paper
Table 4.2 Terms of a classic repo trade
Chapter 6
Table 6.1 Hypothetical money market rates
Table 6.2 Description of LIFFE short sterling futures contract
Table 6.3 Impact of interest‐rate changes
Table 6.4 Vanilla swap example terms
Table 6.5 Swap quotes
Table 6.6 OIS cash flows
Chapter 7
Table 7.1 Simplified ALM profile for a regional European bank
Table 7.2 Funding the liquidity gap: two examples
Table 7.3 Market rates as at 2 June 2004
Table 7.4 Example gap profile
Chapter 8
Table 8.1 ALCO traditional mission
Chapter 14
Table 14.1 Strategic metrics and KPIs
Chapter 15
Table 15.1 Capital framework based on the Basel III framework: hypothetical bank start‐up
Table 15.2 AT1 and T2 instrument requirements
Table 15.3 Level 1 risk taxonomy
Table 15.4 Example risk indicator levels
Table 15.5 Sample incorporation of an institution's relevant risk types in the ICAAP
Table 15.6 ICAAP process
Table 15.7 Capital management risk taxonomy
Table 15.8 MIRA material risks
Table 15.9 SREP slide
Three types of stress testing are applied:
Table 15.10 Initial capital assessment
Table 15.11 Base case scenario projection
Table 15.12 Summary of management actions in stress
Chapter 17
Table 17.1 EAB deposit rates as at January 2009
Table 17.2 Regime implemented at the London subsidiary
Table 17.3 EAB deposit rates as at June 2009
Table 17.4 Final EAB FTP monthly curve
Table 17.5 Other arrangements
Table 17.6 UK commercial bank IRRBB reporting
Table 17.7 Potential net hedged between fixed‐rate assets and liabilities and floating‐rate assets and liabilities
Appendix A
Table A.1 The effect of more frequent compounding
Table A.2 Discount factor table
List of Illustrations
Chapter 1
Figure 1.1 Scope of banking activities
Figure 1.2 Composition of earnings
Chapter 3
Figure 3.1 Credit loss distribution
Figure 3.2 Applying credit loss distributions into capital calculation
Figure 3.3 Risky asset portfolio and capital structure
Figure 3.4 Summary of a risk‐weighted assets calculation for a retail and corporate customer commercial bank
Figure 3.5 Loan principal cash flow profile
Chapter 4
Figure 4.1 Bloomberg screen DCX used for a US dollar market, 3‐month loan taken out for value 18 November 2005
Figure 4.2 Bloomberg screen DCX for a Singapore dollar market, 3‐month loan taken out for value 18 November 2005
Figure 4.3 Libor screen on Bloomberg, 13 September 2016
Figure 4.4 Libor history 2011–2016
Figure 4.5 Sterling curves, 13 September 2016
Figure 4.6 Bloomberg screen GP showing fed funds rate for the period May–November 2005
Figure 4.7 Bloomberg screen GP showing USD overnight Libor rates for the period May–November 2005
Figure 4.8 Classic repo transaction
Figure 4.9 Classic repo trade example
Figure 4.10 FX balance sheet hedging- part (ii)
Figure 4.11 FX balance sheet hedging- part (iii)
Figure 4.12 FX balance sheet hedging- part (iv)
Figure 4.13 FX balance sheet hedging‐ part (i)
Chapter 5
Figure 5.1 Risk‐free and risky curves
Figure 5.2 Yield‐to‐maturity yield curves
Figure 5.3 Curve results when employing Nelson‐Siegel and OLS methods
Figure 5.4 GBP SONIA and GBP swap curves, 13 October 2016
Chapter 6
Figure 6.1 Positive yield curve funding
Figure 6.2 Negative yield curve funding
Figure 6.3 Eurozone AAA sovereign bond yield curve, 15 June 2017
Figure 6.4 Intermediation between stock loan and repo markets; an example using UK gilts
Figure 6.5 Position timeline
Figure 6.6 Key dates in an FRA trade
Figure 6.7 Rates used in FRA pricing
Figure 6.8 Illustration of interest basis mismatch hedging using the OIS instrument
Figure 6.9 Tullet US dollar depo rates, 10 November 2003
Figure 6.10 Garban ICAP OIS rates for USD, 10 November 2003
Chapter 7
Figure 7.1 Cornerstone of traditional ALM philosophy
Figure 7.2 A derivatives trading house's ALM profile
Figure 7.3 Commercial paper programme liability profile
Figure 7.4 Shows the graphical profile of the numbers in Table 7.1
Figure 7.5 Funding position on a daily basis
Figure 7.6 Gap limit report
Figure 7.7 Example of detailed gap profile
Figure 7.8 Gap maturity profile in graphical form
Figure 7.9 Gap maturity profile, bank with no short funding allowed
Figure 7.10 Gap maturity profile, UK high‐street bank
Figure 7.11 Liquidity analysis – example of UK bank profile of maturity of funding
Figure 7.12 Change in spread between 3‐month Prime rate and 3‐month Libor 2009–2010
Chapter 8
Figure 8.1 ALCO reporting input and output
Figure 8.2 ALCO governance organisation
Chapter 9
Figure 9A Template for Board risk appetite statement
Figure 9.1 UK banks' liquidity ratios 1968–2010
Figure 9.4 Liquidity policy statement: basic framework
Figure 9.5 Liquidity policy statement: basic framework
Figure 9.6 Liquidity policy statement: basic framework
Figure 9.7 Liquidity policy statement: basic framework
Figure 9.8 Liquidity policy statement: basic framework
Figure 9.9 Liquidity policy statement: basic framework
Figure 9.10 Bank liquidity report showing 8‐day and 1‐month liquidity ratios
Figure 9.12 Liquidity report and liquidity ratio calculation
Figure 9.13 Cumulative liquidity model
Figure 9.18 Summary liquidity snapshot
Chapter 10
Figure 10.1 Simplified overview of the LCR calculation
Figure 10.2 The US maturity mismatch add‐on
Figure 10.3 Simplified overview of the NSFR calculation
Figure 10.6 Liquidity value of liabilities
Figure 10.9 Deposit product analysis
Figure 10.11 Requirements for LAB (or HQLA) eligibility
Figure 10.12 Pros and cons of the different interest‐rate risk hedging instruments
Figure 10.13 Transition to COREP in the EU
Figure 10.14 End‐to‐end liquidity stress testing process
Figure 10.16 Specimen daily maximum liquidity requirement
Figure 10.17 The total liquidity requirement
Figure 10.18 Weighted average asset encumbrance by country
Figure 10.19 Interest‐rate simulations
Figure 10.20 IRS MtM PV simulations
Figure 10.21 Cross‐currency swap mark‐to‐market PV simulations
Figure 10.22 Comparing IRS and XCY expected exposures
Figure 10.23 Expected swap exposure through life
Figure 10.24 Derivatives funding curve as secured funding COF
Figure 10.25 Uncollateralised derivatives net position FTP pricing
Figure 10.26 Customer IRS and hedging IRS
Chapter 11
Figure 11.1 Bank internal funding arrangement
Figure 11.3 Bank FTP curve and other funding curves
Figure 11.4 Retail banking FTP regime
Figure 11.5 Retail banking asset–liability interconnection
Figure 11.7 Corporate banking FTP regime, asset example
Chapter 12
Figure 12.1 Components of bank P&L
Figure 12.2 NII as a percentage of Total Income – major UK banks, 2014 accounts
Figure 12.3 UK bank NIMs, 2012–2014
Figure 12.4A Bank products that influence NIM
Figure 12.4B WestChoud Bank starting balance sheet position, showing NII and NIM
Figure 12.4C WestChoud Bank, Scenario 1 potential impact on NII/NIM
Figure 12.4D WestChoud Bank, Scenario 2 potential impact on NII/NIM
Figure 12.4E WestChoud Bank, Scenario 3 potential impact on NII/NIM
Figure 12.4F WestChoud Bank, Scenario 4 potential impact on NII/NIM
Figure 12.4G WestChoud Bank, Scenario 5 potential impact on NII/NIM
Figure 12.6 Maturity schedule time buckets for EVE calculation
Figure 12.7 The volatility of UK interest rates over time
Figure 12.10 Interest rate swap schematic
Figure 12.12 A comparison between sterling 1‐month and 3‐month interbank lending rates
Figure 12.13 Period 1 – Amortising pay fixed swap hedge aligned to anticipated behavioural run‐off profile of a loan cohort
Figure 12.14 Period 2 – General level of interest rates falls so loans anticipated to repay quicker than original assumption
Figure 12.15 Period 2 – Balloon receive fixed swap is written to realign swap hedge to behavioural loan run‐off profile
Figure 12.16 Typical timeline for a fixed‐rate mortgage offer
Chapter 13
Figure 13.1 Vanilla securitisation structure
Figure 13.2 Originators and asset classes used for securitisation in Europe
Figure 13.3 Consumer loan vintage analysis
Figure 13.4 ABS vs traditional bond finance
Figure 13.5 Engagement across the organisation and transaction governance
Figure 13.7 Market conditions could adversely affect transaction launch
Chapter 14
Figure 14.1 Leadership commitment
Figure 14.2 Strategy‐setting cycle, pre‐crash
Figure 14.3 Strategy‐setting cycle, post‐crash
Figure 14.4 UK banks customer funding gap, 1997–2009
Figure 14.5 Formulation of capital management strategy
Chapter 15
Figure 15.1 Stylised representation of a typical commercial bank balance sheet
Figure 15.2 Expected and unexpected losses
Figure 15.3 Capital structure considerations under CRR/CRDIV
Figure 15.4 Combined buffer requirement for a bank under Basel III
Figure 15.5 RWA breakdown
Figure 15.6 Capital considerations
Figure 15.7 Hypothetical new bank capital structure minimum compliance with Basel III
Figure 15.8 Formulating capital management strategy
Figure 15.9 The three pillars of capital and risk management
Figure 15.10 Steps involved in the ICAAP production and approval process
Figure 15.11 Three‐level scenario
Figure 15.12 ICAAP governance process: the commonly observed process
Figure 15.13 All‐embracing ICAAP governance process
Figure 15.14 Summary of the ICAAP planning and implementation process, linking strategy and capital management
Figure 15.15 Point‐in‐time capital assessment (1‐year horizon) Pillar I and Pillar IIA
Figure 15.16 Capital surplus/deficit
Figure 15.17 Progress towards key strategic balance sheet objectives
Figure 15.18 Base case capital projection
Figure 15.19 Assessment of capital buffers mixed approach
Figure 15.20 Forward‐looking capital assessment: standard approach
Figure 15.21 Assessment of capital buffers: standard approach
Chapter 17
Figure 17.1 Northern Rock funding types 1998–2007
Figure 17.2 Northern Rock CDS price history April–September 2007
Figure 17.3 Proposed ALM report in table and graph formats
Figure 17.4 Business line funding usage
Figure 17.5 CBD ALCO governance
Figure 17.6 UK commercial bank IRRBB reporting
Figure 17.7 Bank IRRBB hedge structure
Appendix A
Figure A.1 Relationship between NPV and IRR
Figure A.2 A typical brokers' screen
Guide
Cover
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E1
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