The Principles of Banking, 2nd Edition

CHAPTER 10ALM Sundries: Asset Encumbrance, Hedge Accounting, IFRS 9 and EIR¹

Abstract

Items on a bank's ALCO or Executive Committee agenda in any one month will contain a number of approval or discussion items of a technical nature. The topics in this chapter are relevant to the ALM process and are necessarily specialist in nature. An introduction is given here so that committee members and attendees are aware of them, and may research them further if necessary.

This chapter is possibly a rather untidy one as it has ended up as a mixed collection of topics that are important for ALCO members and attendees to be aware of (hence it is in Part II) but have not been granted their own chapter, even though all of the topics are important, each warranting in fact their own book. Luckily these subjects are covered in some depth in other works, so the interested reader should research them further using specialist texts. Therefore we only introduce these topics here. That said, we reiterate that anyone attending the ExCo or ALCO would wish to have a general understanding of these subjects.

It's a bit of a pic'n'mix as the topics are not necessarily directly related. We discuss the nature and risks of asset encumbrance, how it is generated, and discuss future developments on this area as well as key implications for asset and liability management. We also consider a number of accounting related concepts, namely effective intertest rate, hedge accounting and the rules of the IFRS9 standards. ...