asset-liab mgt..pptx

8/14/2019 asset-liab mgt..pptx

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Asset Liability Management in

Banks


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Components of a Bank Balance Sheet

Liabilities Assets1. Capital

2. Reserve & Surplus3. Deposits

4. Borrowings

5. Other Liabilities

1. Cash & Balances with

RBI2. Bal. With Banks &

Money at Call and

Short Notices

3. Investments4. Advances

5. Fixed Assets

6. Other Assets


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Banks profit and loss account

A banks profit & Loss Account has the following

components:

I. Income: This includes Interest Income andOther Income.

II. Expenses: This includes Interest Expended,

Operating Expenses and Provisions &contingencies.


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Evolution

In the 1940s and the 1950s, there was an abundance of funds in

banks in the form of demand and savings deposits. Hence, the focus

then was mainly on asset management

But as the availability of low cost funds started to decline, liability

management became the focus of bank management efforts

Banks started to concentrate more on the management of both sides

of the balance sheet


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What is Asset Liability Management??

It is a dynamic process of Planning, Organizing & Controllingof Assets & Liabilities- their volumes, mixes, maturities, yieldsand costs in order to maintain liquidity and NII.

The process by which an institution manages its balancesheet in order to allow for alternative interest rate and liquidityscenarios

Banks and other financial institutions provide services whichexpose them to various kinds of risks like credit risk, interest

risk, and liquidity risk

Asset-liability management models enable institutions tomeasure and monitor risk, and provide suitable strategies fortheir management.


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An effective Asset Liability Management Technique aims to manage the

volume, mix, maturity, rate sensitivity, quality and liquidity of assets and

liabilities as a whole so as to attain a predetermined acceptable

risk/reward ratio

It is aimed to stabilize short-term profits, long-term earnings and long-

term substance of the bank. The parameters for stabilizing ALM system

are:

1. Net Interest Income (NII):- Diff. b/w interest bearing asset & liability.

2. Net Interest Margin (NIM):-Diff. b/w interest earned & paid.3. Economic Equity Ratio:-Ratio of shareholdersfund to total asset.


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3 tools used by banks for ALM

ALM informationsystems

ALM Organization

ALM Process


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ALM Information Systems

Usage of Real Time information system to gather theinformation about the maturity and behavior of loans andadvances made by all other branches of a bank

ABC Approach :

analysing the behaviour of asset and liability products in thetop branches as they account for significant business

then making rational assumptions about the way in whichassets and liabilities would behave in other branches

The data and assumptions can then be refined over time as the

bank management gain experience

The spread of computerisation will also help banks inaccessing data.


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ALM Organization

The board should have overall responsibilities and should set the limitfor liquidity, interest rate, foreign exchange and equity price risk

The Asset - Liability Committee (ALCO) ALCO, consisting of the bank's senior management (including

CEO) should be responsible for ensuring adherence to the limitsset by the Board

Is responsible for balance sheet planning from risk - returnperspective including the strategic management of interest rateand liquidity risks

The role of ALCO includes product pricing for both deposits andadvances, desired maturity profile of the incremental assets and

liabilities, It will have to develop a view on future direction of interest rate

movements and decide on a funding mix between fixed vs floatingrate funds, wholesale vs retail deposits, money market vs capitalmarket funding, domestic vs foreign currency funding

It should review the results of and progress in implementation of

the decisions made in the previous meetings


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ALM Process

Risk Parameters

Risk Identification

Risk Measurement

Risk Management

Risk Policies and ToleranceLevel


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Under ALM, risks that are typically

managed are.

Will now be discussed in detail

InterestRateRisk

CurrencyRisk

LiquidityRisk


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Liquidity Risk

Liquidity risk arises from funding of long term assets by short term

liabilities, thus making the liabilities subject to refinancing

Arises due to unanticipated withdrawals ofthe deposits from wholesale or retail clients

Funding

risk

It arises when an asset turns into a NPA.So, the expected cash flows are no longeravailable to the bank.

Time risk

Due to crystallisation of contingentliabilities and unable to undertakeprofitable business opportunities whenavailable.

Call Risk


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Liquidity Risk Management

Banks liquidity management is the process of generatingfunds to meet contractual or relationship obligations at

reasonable prices at all times

Liquidity Management is the ability of bank to ensure that its

liabilities are met as they become due

Liquidity positions of bank should be measured on an ongoing

basis

A standard tool for measuring and managing net funding

requirements, is the use of maturity ladder and calculation of

cumulative surplus or deficit of funds as selected maturity

dates is adopted


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Statement of Structural Liquidity

All Assets & Liabilities to be reported as per

their maturity profile into 8 maturity Buckets:

i. 1 to 14 days

ii. 15 to 28 days

iii. 29 days and up to 3 months

iv. Over 3 months and up to 6 months

v. Over 6 months and up to 1 year

vi. Over 1 year and up to 3 years

vii. Over 3 years and up to 5 years

viii. Over 5 years


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Statement of structural liquidity

Places all cash inflows and outflows in the maturity ladder asper residual maturity

Maturing Liability: cash outflow

Maturing Assets : Cash Inflow

Classified in to 10 time buckets at present.

Shows the structure as of a particular date

Banks can fix higher tolerance level for other maturitybuckets.


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An Example of Structural Liquidity Statement

1-14Days15-28Days

30 Days-3 Month

3 Mths -6 Mths

6 Mths -1Year

1Year - 3Years

3 Years -5 Years

Over 5Years Total

Capital 200 200

Liab-fixed Int 300 200 200 600 600 300 200 200 2600

Liab-floating Int 350 400 350 450 500 450 450 450 3400

Others 50 50 0 200 300Total outflow 700 650 550 1050 1100 750 650 1050 6500

Investments 200 150 250 250 300 100 350 900 2500

Loans-fixed Int 50 50 0 100 150 50 100 100 600

Loans - floating 200 150 200 150 150 150 50 50 1100Loans BPLR Linked

100 150 200 500 350 500 100 100 2000Others 50 50 0 0 0 0 0 200 300

Total Inflow 600 550 650 1000 950 800 600 1350 6500

Gap -100 -100 100 -50 -150 50 -50 300 0

Cumulative Gap -100 -200 -100 -150 -300 -250 -300 0 0

Gap % to Total O -14.29 -15.38 18.18 -4.76 -13.64 6.67 -7.69 28.57


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Addressing the mismatches

Mismatches can be positive or negative

Positive Mismatch: M.A.>M.L. and Negative Mismatch M.L.>M.A.

In case of +ve mismatch, excess liquidity can be deployed in moneymarket instruments, creating new assets & investment swaps etc.

Forve mismatch, it can be financed from market borrowings(Call/Term), Bills rediscounting, Repos & deployment of foreigncurrency converted into rupee.


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Currency Risk

The increased capital flows from different nations have contributed toincrease in the volume of transactions

Dealing in different currencies brings opportunities as well as risk

To prevent this banks have been setting up overnight limits and

undertaking active day time trading

Value at Risk approach to be used to measure the risk associated

with forward exposures. Value at Risk estimates probability ofportfolio losses based on the statistical analysis of historical price

trends and volatilities.


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Interest Rate Risk

Interest rate risk refers to volatility in Net Interest Income (NII) orvariations in Net Interest Margin(NIM)

Interest Rate risk is the exposure of a banksfinancial conditionsto adverse movements of interest rates

Though this is normal part of banking business, excessiveinterest rate risk can pose a significant threat to a banksearningsand capital base

Changes in interest rates also affect the underlying value of thebanksassets, liabilities and off-balance-sheet item

NIM= diff. In interest paid and interest received.


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Risk Measurement Techniques

Various techniques for measuring exposure ofbanks to interest rate risks

Maturity Gap Analysis

Duration

Simulation

Value at Risk


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Maturity gap method (IRS)

THREE OPTIONS: A) Rate Sensitive Assets>Rate Sensitive

Liabilities= Positive Gap

B) Rate Sensitive Assets


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Gap Analysis

Simple maturity/re-pricing Schedules can be used to generatesimple indicators of interest rate risk sensitivity of bothearnings and economic value to changing interest rates

- If a negative gap occurs (RSARSL) in a given time band,an decrease in market interest rates could cause a decline inNII

The basic weakness with this model is that this method takesinto account only the book value of assets and liabilities andhence ignores their market value.


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Analysis

Change in inst. rate Change in NII

RSA = RSL Increase NO CHANGE

RSA = RSL Decrease NO CHANGE

RSA > RSL Increase INCREASE

RSA > RSL Decrease DECREASE

RSA < RSL Increase DECREASE

RSA < RSL Decrease INCREASE


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It basically refers to the average life of the asset or theliability

It is the weighted average time to maturity of all the preset

values of cash flows

The larger the value of the duration, the more sensitive is theprice of that asset or liability to changes in interest rates

As per the above equation, the bank will be immunized frominterest rate risk if the duration gap between assets and theliabilities is zero.

Duration Analysis


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Simulation

Basically simulation models utilize computer powerto provide what if scenarios, for example: What if:

The absolute level of interest rates shift

Marketing plans are under-or-over achieved Margins achieved in the past are not sustained/improved Bad debt and prepayment levels change in different interest

rate scenarios

There are changes in the funding mix e.g.: an increasingreliance on short-term funds for balance sheet growth

This dynamic capability adds value to this methodand improves the quality of information available tothe management


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Value at Risk (VaR)

Refers to the maximum expected loss that a bank can suffer inmarket value or income:

Over a given time horizon,

Under normal market conditions,

At a given level or certainty

It enables the calculation of market risk of a portfolio for whichno historical data exists. VaR serves as Information Reportingto stakeholders

It enables one to calculate the net worth of the organization atany particular point of time so that it is possible to focus onlong-term risk implications of decisions that have already beentaken or that are going to be taken


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SUCCESS OF ALM IN BANKS: PRE -

CONDITIONS

Awareness for ALM in the Bank staff at alllevelssupportive Management & dedicated

Teams.

Method of reporting data from Branches/ other

Departments. (Strong MIS). Computerization-Full computerization,

networking.

Insight into the banking operations, economicforecasting, computerization, investment, credit.

Linking up ALM to future Risk Management

Strategies.


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CONCLUSIONAsset-Liability Management has evolved as a vital activity of all financial institutions and

tosome extent other industries too. It has become the prime focus in the banking industry,

with

every bank trying to maximize yield and reduce their risk exposure. The Reserve Bank of

India

has issued guidelines to banks operating in the Indian environment to regulate their

asset-liability

positions in order to maintain stability of the financial system.

Maturity-gap analysis has a wide range of focus, not only as a situation analysis tool, but

also as a planning tool. Banks need to maintain the maturity gap as low as possible in

order toavoid any liquidity exposure. This would necessarily mean that the outflows in different

maturity

buckets need to be funded from the inflows in the same bucket.


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Thankyou!!!

Documents

asset-liab mgt..pptx