Principles of Asset/Liability Management SeminarFederal Reserve System Courses

Type of Participant Targeted

The Principles of Asset/Liability Management (PALM) Seminar is designed for safety and soundness bank examiners. It should be taken in examiners’ careers when they begin to assess and evaluate asset/ liability management (ALM) activities and the market-risk sensitivity of financial institutions as a part of their routine job function.

Prerequisites

Participants should have a general understanding of intermediate financial concepts—similar to that achieved in junior or senior level economics and finance classes. This background should include familiarity with futures, forwards, swaps, and options; duration; and intermediate balance sheet analysis. Participants are encouraged to check their proficiency by reviewing the background papers provided as pre-course supplementary course materials. Also suggested is a review of the STaRT Asset Liability Management Module (see pages 11–12).

Course Overview

PALM provides an in-depth exposure to ALM, concepts, and methodologies as they apply to a financial institution’s banking book--non-trading assets and liabilities. (Trading assets are addressed in a companion class, the Market Risk Analysis Seminar.) The materials covered in PALM will enable participants to identify and draw conclusions about interest rate, investment, and liquidity-risk issues they will encounter while examining financial institutions. The course contains a case study based on an intermediate-sized U.S. commercial bank. The case study is used to illustrate and reinforce the balance sheet ALM concepts presented in the lectures. This 4 1/2-day course has no pre-course work, although background papers on various subjects are provided.

Course Objectives

This program is designed to give participants a broad overview of the basic principles of ALMt, including

• Interest-rate risk
• Investment portfolio management
• Liquidity risk
• Balance sheet hedging
• ALM model risk

The class will also provide participants with a basic understanding of

• How financial markets determine interest rates
• How changes in interest rates can affect the risk posture and profitability of financial institutions
• What tools are available to measure an institution's interest-rate risk and liquidity exposures
• Why and how institutions use certain products to manage their interest-rate risk and liquidity exposures

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