Handbook of Asset and Liability Management, Volume 2 Applications and Case Study

CONTENTS
Introduction to the Series v
Contents of the Handbook vii
Preface xi
Chapter 11
ALM in Banking
JEAN DERMINE 489
Abstract 490
Keywords 490
Introduction 491
1. Economics of banking, five main functions 492
2. The bank’s balance sheet and income statement 495
3. Risk management in banking 498
3.1. Risks in banking 498
3.2. The economics of risk management 500
4. Asset and liability modeling for banks 501
4.1. A neoclassical model of the banking firm and the separation theorem 501
4.2. A multi-period neoclassical model of the banking firm 503
4.3. A valuation model of the banking firm: no tax, no risk, no growth 505
4.4. A valuation model of the banking firm with taxes (no risk) 507
4.5. A valuation model of the banking firm: corporate tax and risk 509
5. Application I. Pricing loan and loan loss provisioning 512
5.1. The pricing of loans 512
5.2. Fair provisioning 514
6. Application II. The measurement of interest rate and liquidity risks 516
6.1. Net interest income at risk 516
6.2. Economic value at risk 519
6.3. Hedging interest rate risk 522
6.4. The measurement of liquidity risk 522
6.5. Cash flow gaps for ‘stress’ scenario 526
7. Application III. Portfolio diversification, marginal risk contribution, and
the allocation of economic capital 526
7.1. Aggregate interest rate risk, an example 527
7.2. Marginal risk contribution 528
8. Bank regulations 530