Behavioural Modelling for ALM with chapter by David Green

A Guide to Behavioural Modelling for ALM

I am excited to announce the publication of A Guide to Behavioral Modelling for ALM by Matteo Formenti and Umberto Crespi in which I contributed a chapter entitled Acknowledging the Elephant in the Room: The Mismatch Centre.

My Chapter Summary:  This chapter will explain how interest rate risk (IRR) and liquidity risk (LR), which are innate to every levered financial institution, create a profitability management problem that can only be solved within a comprehensive and well-functioning funds transfer pricing (FTP) framework. It will be demonstrated how the introduction of FTP produces a new business unit, the mismatch centre, which is a true profit centre that must be analysed and managed as rigorously as any other lending or deposit-gathering business unit if granular earnings attributions are to have economic integrity. The chapter will discuss the implications for risk and profitability management when the mismatch centre is ignored or arbitrarily manipulated, eg, when its earnings are forced to zero. Implications for risk governance, the development and use of behavioural models for non-maturity deposits (NMDs), risk and profitability management systems and regulatory considerations are also addressed.

For a full description of the book, including a complete chapter listing and purchase details, visit Risk Books.