New on FinoLib · Volume IV: Finance Careers
My latest article is now live on FinoLib, the free finance library I write: Asset-Liability Management (ALM) and Credit Analysis Roles, from Volume IV: Finance Careers. Read the summary below for the substance of the topic, then continue to FinoLib for the complete treatment.
E.9 Treasury and Asset-Liability Management (ALM)
The idea in plain words
Bank treasury and asset-liability management, or ALM, keep the bank able to pay its bills under stress. They limit how interest rate moves hit earnings and value, and they price the funding each business uses through FTP, short for funds transfer pricing.
Key points
■LCR = HQLA ÷ 30-day net stressed outflows, at least 100%; inflows count up to 75% of outflows.
■NSFR = available ÷ required stable funding, at least 100%.
■IRRBB is watched through NII sensitivity and economic value of equity.
A closer look
A bank’s treasury and ALM function manages the balance sheet as a whole: it makes sure the bank can meet every outflow under stress (liquidity), limits how much earnings and value move when interest rates move, and charges or credits each business for the funding it uses or brings in. A bank borrows short and lends long by design, so this mismatch is the business; ALM decides how much of it the bank keeps. A corporate treasurer’s cash and hedging job is in C.2: The Treasurer, and capital ratios are in C.15: The Head of Regulatory Capital & Reporting.
A worked example
Worked Example: The Liquidity Coverage Ratio
The LCR asks whether the bank holds enough high-quality liquid assets (HQLA) to survive a 30-day stress: LCR = HQLA ÷ total net cash outflows over 30 days, with a minimum of 100%. An illustrative US bank, in $ billions, using the US rule’s factors (12 CFR 249): Line Formula and substitution $bn Level 1 (reserves, Treasuries) 40 × 100% 40.0 Level 2A (e.g., GSE securities) 12 × 85% 10.2 Level 2B (e.g., investment-grade corporate bonds) 4 × 50% 2.0 HQLA Level 2 = 12.2 ÷ 52.2 = 23% (cap 40%); Level 2B = 3.8% (cap 15%) 52.2 Stable retail deposits 200 × 3% 6.0 Other retail deposits 100 × 10% 10.0 Operational deposits 60 × 25% 15.0 Corporate deposits…
Why It Matters
A bank can be solvent on paper and still fail because it cannot pay depositors this week. On July 28, 2023, the US banking agencies updated their liquidity guidance: banks should regularly update their contingency funding plans, and a bank that counts on the discount window must be operationally ready to use it, including by conducting periodic transactions.
Recap
Bank treasury and ALM keep the bank able to pay under stress, limit rate effects and price funding through FTP. LCR and NSFR must each be at least 100%.
E.10 Credit Analysis
The idea in plain words
Credit analysts study a borrower’s financial statements, compute leverage, coverage and DSCR (the cash available to pay debt compared with the payments due), propose a rating and covenants, and write the credit memo. The relationship manager owns the client, but an independent credit team has to approve the loan.
Key points
■Leverage = debt ÷ EBITDA; DSCR = cash for debt service ÷ (interest + principal).
■Headroom shows how far EBITDA can fall before a breach; the tightest covenant binds first.
■Internal ratings drive price, reserves and capital, and examiners test them.
A closer look
Credit analysts decide whether a borrower can repay, and on what terms. They spread the borrower’s statements, compute ratios, propose an internal rating and covenants, and write the credit memo. Three neighboring jobs differ: the relationship manager (E.11: Relationship Management) wins and owns the client, the credit analyst builds the case for or against the loan, and credit risk, independent and under the CRO (C.7: The Chief Risk Officer), approves it within limits and watches the whole portfolio.
A worked example
Worked Example: Spreading, Ratios and Covenant Headroom
An illustrative manufacturer asks for a refinancing. Spreading puts its statements into the bank’s template so every borrower is measured the same way, with one-off items stripped out of EBITDA. Spread figures ($ millions): revenue 250, EBITDA 40, depreciation and amortization 10, interest 8, total debt 140, cash 20, capital expenditure 6, cash taxes 5, scheduled principal 12.
Recap
Credit analysts spread statements, compute leverage, coverage and DSCR, propose a rating and covenants, and write the credit memo. The RM owns the client; independent credit approves.
What the full article covers
In the full article I take you through these sections:
■E.9 Treasury and Asset-Liability Management (ALM)
■E.10 Credit Analysis
It includes worked examples, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume IV: Finance Careers
Read the full article on FinoLib
The complete article, Asset-Liability Management (ALM) and Credit Analysis Roles, with every worked example, diagram, quiz and source, is free to read in Volume IV, Finance Careers on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance