By Professor Moorad Choudhry, founder of the Certificate of Bank Treasury Risk Management
Asset-liability management (ALM) is the core discipline in banking, and one that must be mastered by every bank, irrespective of its business model, product suite or customer franchise. For bankers ALM encompasses the management of everything from liquidity risk and interest-rate risk to capital planning and cash management. Some people (myself included) also include credit risk in ALM, because of the way they define ALM: the risk management of every transaction that generates a cash flow impact on the balance sheet. But even if one ascribes to the narrower definition of ALM, it is unarguable that the post-crash Basel III regime emphasises a strong adherence to conservative principles of capital and liquidity management in banks – the traditional role of the Treasury function.
Something that one would notice right from the start is the absence of any requirement for Treasurers, or indeed bank practitioners generally, to have a formal technical training and professional qualification before being allowed to practise their art. Unlike doctors or lawyers or accountants or surveyors or most other professional occupations, bankers were never required to have any form of professional certification before they could practise their craft. They still aren’t. In the UK we had the old “Registered Representative” test, but it was and is still mainly for wholesale markets salespersons. Ordinary day-to-day bankers don’t have to take it (and in any case its current format still focuses mainly on wholesale banking). Treasurers or those who work in Treasury certainly aren’t required to take it.
And yet ALM is a technical discipline, an arcane and knowledge-heavy skill that requires a solid grounding in the principles of balance sheet risk management, as well as sound judgement acquired through experience, to be performed adequately. The exhibit below shows why bank Treasury desks must stick to their principles and not follow the herd: the decline in the proportion of liquid assets as a percentage of total assets is marked, and was only arrested and reversed as a result of the crisis.
UK banks liquid assets as percentage of total balance sheet assets 1968-2012
As the experience of 2008-09 made crystal clear, what is the central, lifeblood discipline of banks if not asset-liability management (ALM) and liquidity management? The crash demonstrated once and for all that the balance sheet is everything.
And yet, how many professional associations or examining bodies teach ALM? As far as one can observe, not one. If one emerges from a respectable University with an expensively-acquired MSc in “Banking and Finance” or “Bank Risk Management”, very little of the syllabus would have equipped the individual with the tools and techniques necessary to understand bank ALM, liquidity risk and capital management. As for more specialised subjects like bank internal funds transfer pricing or the “XVAs”, these are completely untouched. Even professional associations around the world are very light on these topics.
Currently there is no recognised professional qualification demonstrating excellence in the bank Treasury space. While there are certainly Treasury professional qualifications and risk management qualifications available, there is no course that concentrates on bank ALM and liquidity risk. That was one of the main reasons we founded Certificate of Bank Treasury Risk Management (BTRM), to plug this knowledge and skills gap.
The markets needs a qualification that is practitioner led, developed and orientated, and will enable students to acquire an advanced-level understanding on the core process of bank ALM governance and liquidity risk management. The BTRM is the first such robust graduate-level professional qualification, and is universal: a subject of relevance to every bank in the world, regardless of business model.
This leads to a final irony, if one can describe it as such, in that there has never been a shortage of academic and practitioner attention on so-called “quantitative finance” (a superfluity in descriptive terms if ever there was one: finance is already a quantitative discipline. One may as well talk about “aerial flight” or “wet swimming”). University degrees, business school bookshops, derivatives textbooks, risk management departments, all of them are obsessed with “quants” and the latest in quant methods. The vogue for many years, both in the practitioner community and academic community, was to focus on (and highlight) ever more sophisticated methods in finance, and talk up how sophisticated the markets had become.
But very few banks, and even fewer of their corporate customers, have any need of “exotic” products. Over 90% of the economy’s hedging needs can be met with plain vanilla derivatives. Sophisticated structured finance products have not produced above-average or even above-market returns for most investors, and certainly nothing to rival the more traditional techniques relied on by someone like Warren Buffett.
The quantitative analyst or “rocket scientist” is a luxury employed in perhaps 3% of the world’s banks. It may even be less. On the other hand, every bank in the world from the largest to the smallest employs a Treasury desk. It’s time for the entire industry, as well as the academic community, to place much more emphasis on the importance of professional and robust ALM training for bank staff. It isn’t an exaggeration to say that the stability of the global economy would be improved as a result.
Professor Moorad Choudhry is author of The Principles of Banking (John Wiley & Sons Ltd 2012) and founder of the Certificate of Bank Treasury Risk Management (www.btrm.org)