Mauritius Banking Association

Treasury & Risk Management for Depository Institutions in the New Regulatory Environment 5 Day Programme Port Lou is , Maur i t ius

2

WORKSHOP OUTLINE COURSE BACKGROUND

The banking crisis of 2008 has spurned a raft of regulatory responses designed to reduce systemic risk in the system and diminish the likelihood of insolvency at the institutional level. The ramifications of these changes will be wide ranging, and effective balance sheet management will be imperative to deliver shareholder value.

The course outlines the new regulatory framework in which depository institutions will now operate, explaining the rational for the changes, and the consequences for the banks in how they fund the balance sheet, mitigate credit exposures, and manage their interest rate exposures.

Key Learning Points

How banks operate and the risk they are exposed to

Causes of the 2008 financial collapse

The regulatory response explained

Implications for deposit taking institutions in the new environment - Managing the liability side of the balance sheet: Funding the bank - Managing the asset side of the balance sheet:

Mitigating credit risk Maintaining a liquidity buffer Off-loading the risk: securitisation

Asset & liability management in the new environment - Interest rate and liquidity “GAP” analysis - Transfer pricing and economic value - Managing interest rate risk

Understanding the tools for minimising interest rate risk - FRA’s and swaps explained

Measuring interest rate risk in the trading book - VAR explained

Funding liquidity risk

Common derivative instruments used in treasury management

Course Training Method

The programme will use traditional and well tried techniques, lectures and worked examples based on real-life trades illustrating in detail how the financial market works and how seemingly disparate markets inter-connect with one another. The course is designed to explain complex issues in a straightforward manner, making the course accessible to those with limited experience and exposure to the financial markets, without recourse to dumbing-down the issues and thereby alienating more experienced professionals.

3

Who should attend?

This course has been prepared for those professionals who perform a wide range of functions involved in the raising of capital for corporate clients from external investors and other stakeholders. The programme will be of particular interest and benefit to those involved in the following job functions:

Corporate directors and treasury staff Corporate finance executives Treasury executives Research analysts Risk managers Back office settlement staff Accountants and auditors Legal staff

AGENDA

Day One: Providing the Context: Treasury Overview Session 1 The Business Model & the Role of Treasury within the Bank

Banking entities and activities Depository institutions v investment and universal banks The scope of bank activities Banking book v trading book

Understanding the distinct business models of the various types

Analysing the financial statements The balance sheet Profit and loss statement

The role of treasury within the organisation Safeguarding the bank’s liquidity Safeguarding the bank’s solvency

Creating shareholder value Shareholder return-on-equity (ROE) The drivers of ROE

Profit centre management Risk adjusted return on capital (RAROC) v Economic Value Added (EVA)

4

Session 2 Identification of the Principal Risk Factors facing Banks: A Balance Sheet Approach

Wholesale & retail credit risk Types of credit risk

Liquidity (funding) risk

Interest rate risk

Mismatch risk

Market liquidity (market price risk)

Market risk

Capital risk

Operational risk

Session 3 Managing the Risks: The Regulatory Response

Brief overview of the contributing factors that caused the banking crisis

Ramifications of the crisis

Managing the risk: “high level” analysis and the regulatory response: Strengthening the global capital framework

The three pillars of Basel II & III explained Raising the quality, consistency and transparency of the capital base Enhancing risk coverage Supplementing the risk-based capital requirement with a leverage ratio Reducing pro-cyclicality and promoting countercyclical buffers

Introducing a global liquidity standard Liquidity Coverage Ratio Net Stable Funding Ratio Monitoring tools

5

Day Two: The Impact of the New Regulatory Approach on Financial Institutions Session 1 Funding the Bank in the New Regulatory Environment

New regulatory definitions of capital What constitutes Tier 1 capital?

Distinguishing between Core Equity Tier 1 capital and Additional Tier 1 capital Defining Tier 2 capital

Limits and minima in each capital class

Funding the bank balance sheet Hybrid capital in the new environment Contingent convertible securities

Session 2 Managing the Asset Side of the Balance Sheet: Risk Weighted Assets

Defining the trading and banking books

The standardised approach to credit risk in the banking book

The internal ratings based approach (IRB Approach) Expected losses (EL) v unexpected losses (UL) Probability of default (PD), loss given default (LGD) and exposure at default (EAD) explained Minimum requirements for IRB

Credit mitigation in the new environment Collateral: Funded credit risk mitigation in the banking book Unfunded credit risk mitigation in the banking book: Guarantees and credit derivatives

Session 3 Funding & Balance Sheet Management using Securitisation

Motivation

The economics of securitisation

Covered bond v mortgage backed securities

Collateralised debt obligations

New proposals for regulatory capital

6

Day Three: Asset & Liability Management (1):Measuring & Managing the Banking

Book Interest Rate Risk Session 1 Effective Loan Pricing

Net interest income as a margin on deposits and loans

Break-even pricing and the “equity” spread

The role of economic capital Economic capital allocation

Loan pricing incorporating credit risk and bad-debt provisions

Session 2 Funds Transfer Pricing & the Management of ALM Risks

Problems with traditional approaches to transfer pricing

Matched funds transfer pricing

Transfer pricing for intermediate maturity instruments

Efficient allocation of capital

Session 3 Controlling Interest Rate Risk in the Banking Book (1)

Measuring the interest rate risk

The role of the accounting methodology on the interest rate risk exposure

Understanding the interest rate gap Creating and interpreting the gap report Marginal interest rate gaps Reporting interest rate risk

Limitations to Gap Analysis & Possible Solutions Problem with gap analysis Using simulations

7

Session 4 Controlling Interest Rate Risk in the Banking Book (2)

Bank solvency and the economic value of equity

The aggregation of interest rate risk on the banking book

Using derivative products to hedge interest rate risk

What about trading book interest rate risk?

Day Four:Asset & Liability Management (1):Liquidity Risk Measurement & Management

Session 1 Measuring Interest Rate Risk in the Trading Book

Definition of VAR

What does VAR miss: Shortfall risk

VAR and capital

The importance of coherent risk measures

How do we aggregate risks

Approaches to back-testing

Overview of risk methodologies Models based on distributional assumptions

Parametric methods Monte Carlo simulation

Calculating VAR using empirical distributions: the historical simulation approach

Regulatory capital requirements for the trading book: 2016 provisions explained

Application to derivative instruments

Session 2 Funding-Liquidity Risk in ALM

The liquidity policy statement

Measurement of liquidity risk Expected funding requirements Unusual funding requirements Crisis funding requirements and economic capital

8

Issues for determining the liquidity gap time profile

The new regulatory framework

Liquidity risk management

Session 3 The Anatomy of a Bank Liquidity Crisis

The business model re-examined

Day Five: Common Derivative Instruments for Managing Treasury Risk Session 1 Money Market Derivatives: FRA

Deriving a forward interest rate using depos

The forward yield curve

What has changed since the financial crisis

Forward Rate Agreements Defining the terms and cash flow dates Using the settlement formula to lock-in a forward borrow/lend rate Marking-to-market a FRA

Hedging with FRAs, hedged rates, imperfections

Creating synthetic loans & deposits with FRA’s

Case study: Hedging cash exposures with FRAs and calculating hedged costs of borrowing or lending

Session 2 Money Market Swaps

Definition & mechanics of swaps

Overnight Index Swaps (OIS): Mechanics Creating synthetic interbank borrowing/lending exposures Importance following the financial crisis

The function of interest rate swaps

Types of swap including basis swaps

Currency swaps v FX swaps

Case study: Calculating the cash flows of a OIS