9 Class Hours

Instructor: Donald Musso

This course builds on the foundation provided in the first year Asset and Liability Management course by examining, in detail, the various components to bank profitability and different aspects of risk management at community banks. The primary focus is on balance sheet management to achieve sustainable earnings growth within acceptable risk parameters. The framework is comprehensive enterprise risk management (ERM) incorporating a CAMELS self-assessment. Key concepts include a detailed assessment of interest rate risk, a critique of deposit strategies and alternative funding strategies, an assessment of liquidity and liquidity planning and the management of capital. It introduces the basics of interest rate swaps, caps and floors. The course also examines the objectives and basics of managing the investment portfolio. Particular emphasis is placed on the nature of policy statements and their use in managing risk. Participants will engage in several exercises requiring risk management decisions with a comprehensive case study of a bank’s ERM information and risk management practices. Participants will use the framework provided to evaluate the overall risk profile of their institution using UBPR information to construct an ERM profile.

Upon completion of this class, students will be able to:

  • Assess the importance of key economic indicators for managing interest rate and liquidity risk and making investment portfolio decisions
  • Understand how to measure and manage interest rate risk according to GAP and earnings sensitivity analysis
  • Understand how to measure and manage interest rate risk according to duration-based measures of risk and economic value of equity sensitivity analysis
  • Evaluate the strengths and weaknesses of balance sheet measures of liquidity risk and cash flow measures/models of liquidity risk
  • Evaluate funding strategies involving FHLB advances and other leverage alternatives
  • Critique the costs and benefits of different forms of external capital and various strategies to increase key capital ratios
  • Evaluate the implied value of options embedded in callable bonds and mortgage-backed securities
  • Critique specific policy objectives and policy targets for interest rate risk and liquidity risk
  • Understand the framework and value for conducting stress tests related to the institution’s financial condition

Annual School Session

Second Year Core Course

Financial Management Track