Rafael Niell - ALM (pdf – 235.66 KB)

36 Pages·2013·0.23 MB·English

IIF LATAM CHIEF RISK OFFICERS FORUM
ENHANCING ALM AND BALANCE SHEET RISK
MANAGEMENT IN LATIN AMERICAN BANKS
13 JUNE 2013
Miguel Yagüe ([email protected])
Rafael Niell ([email protected])
OLIVER WYMAN GROUP
© Oliver Wyman | MAD-BNT01611-010
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The main objective of this session is to illustrate our perspective on best
practice approaches to manage ALM risk in Latin America
• Many Latin American countries are facing a period of significant credit growth, margins
decrease, and/or exchange rate volatility
• This, together with new capital requirements, is putting pressure on return and adding new
risks to their banks’ balance sheets
• Optimizing ALM and balance sheet management in line with best practices has a strong
upside
• Risk usually plays a key role in ALM and balance sheet risk management along a number of
dimensions
– ALM governance and management (ALCO)
– ALM risk measurement
– Fund Transfer Prices (FTPs)
– Liquidity risk measurement and management
• This session is aimed at addressing a number of key ALM risk management challenges and
related practices in this area, with focus on Latin American banks
• We have also included some real client examples to better illustrate the topics
• We encourage questions to be asked throughout the presentation
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ALM risk has increased relative importance among Latam CROs in the last
couple of years
Oliver Wyman Risk Management Perspectives 2012-2013
Risk type priorities in 2012-2013
Priority order (with 1 being the highest priority)
5
Lower
priority
4
3
2
1
Higher
priority
0
Credit Risk Liquidity Risk Market Risk Interest rate Risk Operational Risk Business Risk
Latam Europe
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Section 1 Banking book risk basics
1. Banking Book risk basics
ALM risk arises from the structural mismatch between assets and liabilities
on the balance sheet
1 Repricing mismatch of assets and liabilities 2 Mismatch of FX positions
Repricing profile of balance sheet items Currency denominations of balance sheet items
As % of total assets in PEN As % of total assets at current FX rates
60% 60%
40% 40%
20% 20%
0% 0%
-20%
-20%
-40%
-40%
0-1 1-6 6-12 1-3 3-5 5-10 > 10 NA
-60%
month months months years years years years PEN USD
Assets Liabilities Assets Liabilities
Interest rate risk FX risk
• Interest rate risk materialises in form of interest rate • FX risk arises from balance sheet items denominated
volatility leading to changes in the IR curve (shifts, twists, in a different currency than the reporting currency
etc.)
• The foreign exchange risk is driven by the volatility of
• Balance sheet assets and liabilities have different exchange rates of all currencies on the balance sheet
sensitivities to interest rates in terms of economic value and
generated margin
• The risk increases depending on the difference in sensitivity
to interest rates between assets and liabilities
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1. Banking Book risk basics
For assessing the IR risk from an ALM profile the sensitivities to single
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interest rates need to be derived – in contrast to the liquidity approach
Payment profile of a bullet loan Payment profile of a bullet
loan
Interest Economic
Repricing Liquidity payment value1
maturity maturity
(3y) (3y)
Fixed rate
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12
No impact on interest payments since
loan is at fixed rate; variation of IR
Assets Loan interest rate 3-year interest rate
leads to changes in NPV of loan
Interest Economic
payment value1
Repricing Liquidity
maturity maturity
Variable rate
(1y) (3y)
Interest payments change according
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12
to market rate movement; but
Assets Loan interest rate 3-month interest rate variation of IR leads has no impact on
NPV of loan
When looking at interest rate risk, repricing maturity instead of liquidity maturity needs to be
considered
1. Net present value of cash flows, discounting with IR curve
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1. Banking Book risk basics
The movement of interest rates impacts net interest margin and value
1
depending on the repricing gap between interest earning assets and
interest bearing liabilities
Impact of rising interest rates on value and net interest margin for prototype balance sheets
Assets and liabilities by repricing maturity intervals
Impact on economic
value1and net interest
margin
40
• Loans with longer repricing maturity funded by
s
g 20 deposits with shorter repricing maturity
n
Asset duration > di • When interest rates rise, interest paid on
n 0
liability duration sta deposits has to be increased in order to keep
ut -20 deposits whereas interest earned on loans
O
stays fixed
-40
40
s • Repricing maturities of assets and liabilities are
g 20
n matched, no repricing gap
Asset duration = di
liability duration stan 0 • Wdehpeons iitnst earneds ti nrtaetreess tr iesea,r ninetde roens tl opaanids oanre
Out -20 increased simultaneously
-40
40
• Loans with shorter repricing maturity funded by
s deposits with longer repricing maturity (atypical
g 20
Asset duration < din since unsustainable negative net interest
an 0 margin in regular interest rate environment)
liability duration Outst -20 • Wloahnesn cinatne rbees ti nrcarteeass reisde winhteerreeasst einatrenreeds to pna id
on long-term deposits stays fixed
-40
Assets Liabilities Yield curve Stressed yield curve
1. Net present value of cash flows, discounted with IR curve
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1. Banking Book risk basics
The US Savings & Loans crisis in the 1980s is a good example to
1
emphasize the need for and importance of managing the structural interest
rate risk
The contribution of interest rate volatility to the US Illustrative development of interest rates during the
Savings & Loans crisis Savings & Loans crisis
• S&L banks were local US banks involved in the core 18%
banking business of a typical bank
– Deposit-taking with short maturities 16%
– Lending longer term, typically 30-year mortgages
14%
• Until the crisis the Federal Reserve enforced stable
Negative
interest rates which allowed the S&Ls to NII
make a good margin on the mismatch 12%
– Banks paid about 4% to depositors
– Received about 8% interest rate on mortgages, 10%
Average
typically fixed
loan rate
8%
• When the Federal Reserve let the interest rates float in
the 1980s, the short term rates rose as high as 16%
Positive
6%
– Deposit-based funding cost rose to 16% as
NII
depositors demanded higher interest for not pulling
their funds 4%
Average
– Mortgages fixed at 8% for a long duration led to
deposit rate
average loan rates rising at a slower pace than short 2%
term deposit rates
– This meant an unsustainable structure, leading to
0%
many bankruptcies 1 2 3 4 5 6
Time
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1. Banking Book risk basics
Banking book FX risk has several sources and materializes in volatility
2
positions and cashflows denominated in a foreign currency
Banking book FX risk Impact of USD devaluation on balance sheet reported
in PEN
• FX risk outside of the trading book arises from a A&L positions by currency
mismatch in positions denominated in currency converted to PEN amounts
different from the reporting currency A L
• Such positions outside of the trading book include
50 PEN
mainly:
100 PEN
– Foreign currency loans (in the banking book) 50 PEN
– Foreign currency assets in the investment portfolio
– Wholesale and deposit funding in foreign currency
to profit from lower interest rates
– Structural FX positions arising from foreign USD devaluates by 20 %
subsidiaries
• FX derivatives typically appears in both trading and
banking book – derivatives used for managing ALM
A L
position in the non-trading book investment securities
Translates
portfolio (Treasury’s AFS portfolio) is considered within
into 10% 40 PEN
the banking book market risk 100 PEN
loss of value
of assets 40 PEN
USD denominated assets
PEN denominated assets
PEN denominated liabilities
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