Foreword xiii
Preface xix
About the author xxiii
1 BANK BUSINESS AND CAPITAL 1
Banking business 2
Interest income 4
Fees and commissions 4
Trading income 4
Costs 5
Capital markets 5
Scope of banking activities 8
Capital 9
Banking and trading books 10
Financial statements and ratios 13
The balance sheet 13
Profit and loss report 14
References 21
2 THE MONEY MARKETS 23
Introduction 25
Securities quoted on a yield basis 27
Money market deposits 27
Certificates of deposit 29
CD yields 30
Securities quoted on a discount basis 34
Treasury bills 36
Banker's acceptances 37
Eligible banker's acceptance 38
Commercial paper 39
Commercial paper programmes 40
Commercial paper yields 42
Asset-backed commercial paper 43
Repo 48
Definition 49
The classic repo 50
Examples of classic repo 52
The sell/buyback 56
Examples of sell/buyback 58
Repo collateral 60
Legal treatment 62
Margin 62
Variation margin 64
Currencies using money market year base of 365 days 65
3 THE YIELD CURVE 67
Importance of the yield curve 68
Using the yield curve 69
Yield-to-maturity yield curve 71
Analysing and interpreting the yield curve 72
Theories of the yield curve 73
The zero-coupon yield curve 83
Example calculation illustrations 88
Forward rate calculation for money market term 91
Understanding forward rates 92
Bibliography 93
4 INTRODUCTION TO TRADING AND HEDGING 95
Trading approach 96
The yield curve and interest rate expectations 96
Credit intermediation by the repo desk 98
Specials trading 100
Matched book trading 102
Interest-rate-hedging tools 103
Interest rate futures 103
Forward rate agreements 110
FRA mechanics 112
Overnight interest rate swaps 123
Credit risk hedging 129
Understanding credit risk 130
Credit rating rationale 133
Credit limit setting and rationale 135
Loan origination process standards 139
Bibliography 141
5 ASSET AND LIABILITY MANAGEMENT I 143
Basic concepts 144
Liquidity gap 147
Managing liquidity 153
The liquidity ratio 156
The liquidity portfolio 157
6 ASSET AND LIABILITY MANAGEMENT II 167
Introduction 168
Basic concepts 169
Interest rate risk and source 174
The banking book 180
The ALM desk 181
Traditional ALM 182
Developments in ALM 184
Liquidity and interest rate risk 185
The liquidity gap 185
Gap risk and limits 186
Liquidity management 192
Interest rate gap 194
Portfolio-modified duration gap 197
Critique of the traditional approach 198
The cost of funding 199
Securitization 202
The securitization process 204
Benefits of securitization 206
Generic ALM policy for different-sized banks 212
NPV and value-at-risk 219
Bibliography 220
7 ASSET AND LIABILITY MANAGEMENT III: THE ALCO 223
ALCO policy 224
ALCO reporting 227
8 BANK LIQUIDITY RISK MANAGEMENT 233
The liquidity policy statement 234
Principles of bank liquidity risk management 241
Measuring bank liquidity risk: key metrics 244
Internal funding rate policy 252
Conclusion 259
9 A SUSTAINABLE BANK BUSINESS MODEL: CAPITAL, LIQUIDITY AND LEVERAGE 261
The new bank business model 262
Liquidity risk management 271
The liquid asset buffer 276
Conclusions and recommendations 278
References 279
10 BANK REGULATORY CAPITAL 281
Banking regulatory capital requirements 282
Capital adequacy requirements 284
A primer on Basel II 285
Impact on specific sectors 289
Basel III 304
Bibliography 306
Appendix A Summary of bank product line 307
Appendix B Financial markets arithmetic 317
Appendix C List of abbreviations and acronyms 339
Index 343
