Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
Asset and liability management come of age
The annual conference of the UK Asset and Liability Management Association is becoming an increasingly important part of the banking world. There are many reasons for this. Risk management now has a central place in the minds of senior banking people. The whole process of Basel II has concentrated their minds on many other areas of ALM as well. But it is also a case of what once was seen as arcane becoming central to the whole process of banking.
And the UK ALMA is adapting to this changing business by changing itself. Crucially it chose its AGM at the annual conference to formalize the dropping of the UK prefix to the name of its organization. Now it will look more formally to Europe and to the US to spread its word. And it will also, doubtless slowly at first, try its hand at lobbying on issues in a more formal way. We carry a short report in this issue on what happened at the conference.
A measure of ALMA's growth in status was the attendance at the dinner on the evening preceding the conference, of Paul Tucker, Executive Director of the Bank of England, and a member of committee which sets UK interest rates. In turn he chose the occasion to make a ground-breaking speech on the whole issue of UK banking, the process of interest-rate setting and many other issues central to the world of ALM. We are very happy at Balance Sheet to be able to provide readers with that speech in its entirety, including the array of statistical information that backed up Tucker's views.
We are also happy at Balance Sheet to be able to devote a sizeable chunk of space in this issue to further refinements on the road to Basel II and all its implications for the banking industry. Slotting neatly in with the themes of the ALMA conference is a wide-ranging overview of the history of regulating liquidity in the banking world by one of the ALMA committee members, Phil Leverick, Head of Balance Sheet Management with the Royal Bank of Scotland. His is a wise old head and it has been thinking through most of the central issues for many years now. His article is both a comprehensive history of how we got to where we are today, and, as the title "Liquidity regulation into the 21st century" suggests, advice on where this central issue will take us in the next few years.
Leverick's article is followed by a sequence of articles designed to provide clear advice for grappling with the difficulties of Basel II. David Rowe, Dean Jovic and Richard Reeves of SunGard, explain why it is crucial for financial institutions to build an advanced economic capital framework, and Jens-Peter Jensen of SAP argues that the huge system changes that the Basel II process entails require ever more concentration on the core idea of creating an integrated risk platform.
On a more specific risk management topic Amin Mawji, who has just published a book on the subject, provides a guide to controlling risks on long-term contracts. Coming from someone who spends his life advising on aerospace and defence industry topics the advice is cogent. In those areas technology is often running at the limit of understanding and controlling risks in such projects is a tightrope walk of a skill.
Our columnists are on their usual form this issue. Malcolm McCaig, an old hand in the risk management world at what is now Deloitte, takes a look at the latest regulations in the world of the UK financial institutions which have emanated, clarified or not, from the Financial Services Authority, the main UK regulator. He sifts through and suggests that for many banks it may be later than they thought.
Then Matthew Leitch takes his view of the world of internal controls. When it comes to strategic blunders, he suggests, ordinary risk controls go out the window. The solution is not to look at the formal controls but to see where the strategy had it wrong in the first place. And Michael Mainelli, as ever, brings this issue of Balance Sheet to a close with some good iconoclastic thinking. This time the people who should be worried are the investment bankers. But, having read his article, they will know what to do about the worries that Mainelli identifies. The only problem left, which runs through all our articles from Basel to risk management, from interest rates to credit risk, is whether once the problem has been identified anyone will do anything about it.