Why know-how, experience and tools matter

Asset & Liability Management (ALM) and Funds Transfer Pricing (FTP) are no longer just technical disciplines sitting somewhere between Treasury, Risk, and Finance. In today’s banking environment, they are core management frameworks that directly influence profitability, balance sheet resilience, and strategic decision‑making.

Banks that apply ALM and use FTP professionally are better prepared to manage interest rate risk, liquidity risk, structural balance sheet positions, and internal pricing signals across business lines. Those that do not often struggle with distorted incentives, suboptimal balance sheet structures, and weak steering under stress.

This article brings together key principles from my earlier work on ALM, FTP, and quantitative planning, and structures them into a coherent view on what is needed for professional ALM and FTP application in a bank, and how best‑practice frameworks are built and used in practice.

What Do You Need for Professional ALM and FTP Application in a Bank?

From experience across many institutions, professional ALM and FTP rest on three fundamental pillars:

1️⃣ Know‑How – The Right Concepts and Interpretation

ALM and FTP are conceptually well described in regulation and textbooks. The real challenge, however, lies in interpretation and application.

Banks need to clearly understand:

• What FTP is meant to achieve (economic steering, not accounting allocation)
• How ALM links profitability with interest rate and liquidity risk
• How behavioral assumptions, optionality, and product features influence results
• Where regulatory metrics such as IRRBB (EVE and NII perspectives), LCR, and NSFR end — and where internal economic steering begins

Without strong conceptual clarity, even sophisticated models produce misleading signals. Over the years, we at Bearning have transformed long-term ALM and FTP experience into practical know-how that banks can actually apply — not just calculate.

2️⃣ Experience – Lessons from Real Balance Sheets

ALM and FTP cannot be designed in isolation. Each bank has:

• A specific business model
• Unique product structures
• Different client behavior
• Market access constraints

Experience matters in understanding how models behave over the cycle, how they react under stress, and where theoretical purity must be adjusted for business reality.

This experience is especially critical when:

• Introducing or redesigning FTP frameworks
• Aligning Treasury, Risk, and Finance perspectives
• Preparing materials for ALCO discussions, management boards, and supervisory dialogue
• Explaining IRRBB sensitivity, liquidity risk drivers, and balance sheet trade-offs in a way that supports decisions, not just compliance

3️⃣ A Tool – To Apply Know‑How Consistently and Transparently

Even the best know‑how and experience will fail without a robust quantitative tool. Spreadsheets may work for illustration, but not for professional balance sheet steering.

That is why we at Bearning cooperate with ALM and quantitative planning system partners, allowing banks to:

• Implement FTP curves consistently
• Run dynamic ALM simulations
• Integrate interest rate and liquidity dimensions
• Translate strategy into measurable outcomes

The combination of know‑how, experience, and professional tools is what turns ALM and FTP into effective management frameworks.

Building a Professional FTP Framework in a Bank

FTP is the backbone of internal balance sheet steering. Its role is to:

• Transfer interest rate and liquidity risk to Treasury
• Provide correct pricing signals to business lines
• Enable fair performance measurement

Key Building Blocks of an FTP System

A robust FTP framework typically includes:

• Reference curve (risk‑free or near risk‑free base)
• Liquidity premium reflecting funding value and scarcity
• Term structure aligned with behavioral maturities
• Optionality treatment (prepayments, early withdrawals)

FTP should reflect economic reality, not just contractual cash flows. This requires behavioral modeling and a clear governance framework.

FTP Curve Construction – More Than a Technical Exercise

Building an FTP curve is not just about market data. It involves strategic choices:

• Which curve best reflects marginal funding cost?
• How to differentiate stable vs. volatile funding?
• How to reflect long‑term structural liquidity value?

Banks that oversimplify FTP curves often distort business incentives — for example, favoring short‑term volume over stable long‑term funding.

A professional FTP curve aligns:

• Treasury funding strategy
• ALM risk profile
• Business pricing decisions

ALM as a Balance Sheet Optimization Framework

Modern ALM goes far beyond static gap analysis and regulatory reporting. Its objective is balance sheet optimization under risk constraints.

Key ALM dimensions include:

• Interest rate risk in the banking book (IRRBB – EVE and NII views)
• Structural liquidity risk beyond LCR and NSFR horizons
• Capital sensitivity and interaction with balance sheet growth
• Earnings volatility and hedge effectiveness
• Interest rate risk in the banking book (IRRBB)
• Structural liquidity risk
• Capital sensitivity
• Earnings volatility

Advanced ALM frameworks allow banks to simulate:

• Different interest rate scenarios
• Business growth assumptions
• Hedging strategies
• Funding mix changes

This transforms ALM from a reporting function into a strategic planning tool.

Best‑Practice Liquidity and Interest Rate Risk Management

Liquidity Management – Beyond Regulatory Ratios (LCR & NSFR)

While LCR and NSFR are essential supervisory metrics, they are not sufficient for economic steering or ALCO decision-making. Best‑practice banks:

• Analyze liquidity gaps across time buckets
• Price liquidity correctly via FTP
• Understand the behavioral stability of deposits
• Integrate contingency funding considerations

FTP plays a critical role by embedding liquidity value directly into business pricing.

Interest Rate Risk – From Measurement to Steering

Effective IRR management — in line with IRRBB expectations — requires:

• Consistent measurement (EVE and NII perspectives)
• Integration with FTP and hedging decisions
• Clear ALCO communication

Banks that link IRR analysis with FTP signals can proactively steer product pricing, hedging volumes, and balance sheet structure — a capability increasingly expected by ALCOs and supervisors alike.

The Role of Quantitative ALM Planning Tools

Advanced ALM systems enable banks to:

• Connect strategy, risk, and profitability
• Test decisions before implementing them
• Support management discussions with transparent analytics

The value of such tools lies not in complexity, but in their ability to translate management questions into quantitative answers.

When combined with strong know‑how and experience, quantitative ALM planning becomes a decisive competitive advantage.

Final Thoughts

Professional ALM and FTP are not about having the most complex models. They are about:

• Clear economic logic
• Consistent internal pricing signals
• Informed strategic decision‑making

Banks that invest in know‑how, experience, and the right tools build balance sheets that are not only compliant, but resilient, profitable, and strategically aligned.

At Bearning, this combination has been at the core of our work with banks for many years — turning ALM and FTP from technical disciplines into practical management frameworks.

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