Foreword xiii Preface xix About the author xxiii 1 BANK BUSINESS AND CAPITAL 1 Banking business 2 Interest income 4 Fees and commissions 4 Trading income 4 Costs 5 Capital markets 5 Scope of banking activities 8 Capital 9 Banking and trading books 10 Financial statements and ratios 13 The balance sheet 13 Profit and loss report 14 References 21 2 THE MONEY MARKETS 23 Introduction 25 Securities quoted on a yield basis 27 Money market deposits 27 Certificates of deposit 29 CD yields 30 Securities quoted on a discount basis 34 Treasury bills 36 Banker''s acceptances 37 Eligible banker''s acceptance 38 Commercial paper 39 Commercial paper programmes 40 Commercial paper yields 42 Asset-backed commercial paper 43 Repo 48 Definition 49 The classic repo 50 Examples of classic repo 52 The sell/buyback 56 Examples of sell/buyback 58 Repo collateral 60 Legal treatment 62 Margin 62 Variation margin 64 Currencies using money market year base of 365 days 65 3 THE YIELD CURVE 67 Importance of the yield curve 68 Using the yield curve 69 Yield-to-maturity yield curve 71 Analysing and interpreting the yield curve 72 Theories of the yield curve 73 The zero-coupon yield curve 83 Example calculation illustrations 88 Forward rate calculation for money market term 91 Understanding forward rates 92 Bibliography 93 4 INTRODUCTION TO TRADING AND HEDGING 95 Trading approach 96 The yield curve and interest rate expectations 96 Credit intermediation by the repo desk 98 Specials trading 100 Matched book trading 102 Interest-rate-hedging tools 103 Interest rate futures 103 Forward rate agreements 110 FRA mechanics 112 Overnight interest rate swaps 123 Credit risk hedging 129 Understanding credit risk 130 Credit rating rationale 133 Credit limit setting and rationale 135 Loan origination process standards 139 Bibliography 141 5 ASSET AND LIABILITY MANAGEMENT I 143 Basic concepts 144 Liquidity gap 147 Managing liquidity 153 The liquidity ratio 156 The liquidity portfolio 157 6 ASSET AND LIABILITY MANAGEMENT II 167 Introduction 168 Basic concepts 169 Interest rate risk and source 174 The banking book 180 The ALM desk 181 Traditional ALM 182 Developments in ALM 184 Liquidity and interest rate risk 185 The liquidity gap 185 Gap risk and limits 186 Liquidity management 192 Interest rate gap 194 Portfolio-modified duration gap 197 Critique of the traditional approach 198 The cost of funding 199 Securitization 202 The securitization process 204 Benefits of securitization 206 Generic ALM policy for different-sized banks 212 NPV and value-at-risk 219 Bibliography 220 7 ASSET AND LIABILITY MANAGEMENT III: THE ALCO 223 ALCO policy 224 ALCO reporting 227 8 BANK LIQUIDITY RISK MANAGEMENT 233 The liquidity policy statement 234 Principles of bank liquidity risk management 241 Measuring bank liquidity risk: key metrics 244 Internal funding rate policy 252 Conclusion 259 9 A SUSTAINABLE BANK BUSINESS MODEL: CAPITAL, LIQUIDITY AND LEVERAGE 261 The new bank business model 262 Liquidity risk management 271 The liquid asset buffer 276 Conclusions and recommendations 278 References 279 10 BANK REGULATORY CAPITAL 281 Banking regulatory capital requirements 282 Capital adequacy requirements 284 A primer on Basel II 285 Impact on specific sectors 289 Basel III 304 Bibliography 306 Appendix A Summary of bank product line 307 Appendix B Financial markets arithmetic 317 Appendix C List of abbreviations and acronyms 339 Index 343.