Making ALM function more effectively

On the 17th January 2011, the FSA sent a letter to all banking chief executives on what constitutes good practice within ALM. Following the FSA’s recent observations and recommendations, ALMIS International is carrying out further research to find out the views of small to medium size banks.

These observations and recommendations can help banks improve their ALM effectiveness and some of the key points made by the FSA are outlined below.

Observations & Recommendations made by FSA

1. Structure of ALCO

The FSA recommend that all business heads, the CFO, Group Treasurer, the Chief Risk Officer, the Head of Market Risk, the Head of ALM, Head of Internal Audit and Chief Economist attend ALCO meetings. Along with this, it was observed that the more often the CEO attended meetings, the more effective they were.

2. Forward Looking

There has been much more focus within the sector to monitor emerging risks and base decisions on the future and it was observed by the FSA that ALCO meetings that focused on proactive management, rather than focusing on the past, were more effective.

3. Liquidity & Funding

It was uncovered that ALCO meetings which focused on the maturity profile were not as effective as firms that considered all risks such as changing competitive landscape, and different behavioural assumptions.

4. Interest Rate Risk in the banking Book (IRRBB)

The FSA states that it is good practice to account for varying behavioural assumptions and non interest rate drivers such as competition. They also recommend that banks use a number of different risk measures such as EVE, VaR, NII, Basis Risk and Scenario Stress Testing.

5. Reverse Stress Testing

Another recommendation made by the FSA is for banks to carry out reverse stress testing and report these outcomes as it allows banks to stay within their risk appetite.

ALMIS International will be releasing the results from their research shortly.