9. Assets Liability Management
It is a dynamic process of Planning,
Organizing & Controlling of Assets &
Liabilities- their volumes, mixes,
maturities, yields and costs in order to
maintain liquidity and NII.
11. Purpose & Objective of ALM
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 ration.
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.
2.
3.
Net Interest Income (NII)
Net Interest Margin (NIM)
Economic Equity Ratio
12. Liquidity Management
Bank’s liquidity management is the process of
generating funds to meet contractual or
relationship obligations at reasonable prices at
all times.
New loan demands, existing commitments,
and deposit withdrawals are the basic
contractual or relationship obligations that a
bank must meet.
13. Adequacy of liquidity position for a
bank
a.
b.
c.
d.
e.
f.
g.
h.
Analysis of following factors throw light on a
bank’s adequacy of liquidity position:
Historical Funding requirement
Current liquidity position
Anticipated future funding needs
Sources of funds
Options for reducing funding needs
Present and anticipated asset quality
Present and future earning capacity and
Present and planned capital position
14. Funding Avenues
a.
b.
c.
d.
e.
To satisfy funding needs, a bank must
perform one or a combination of the
following:
Dispose off liquid assets
Increase short term borrowings
Decrease holding of less liquid assets
Increase liability of a term nature
Increase Capital funds
15. Types of Liquidity Risk
• Liquidity Exposure can stem from both
internally and externally.
• External
liquidity
risks
can
be
geographic, systemic or instrument specific.
• Internal liquidity risk relates largely to
perceptions of an institution in its various
markets: local, regional, national or
international
16. Other categories of liquidity risk
• Funding Risk
- Need to replace net outflows due to
unanticipated withdrawals/non-renewal
• Time Risk
- Need to compensate for non-receipt of
expected inflows of funds
• Call Risk
- Crystallization of contingent liability
17. 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 money market instruments,
creating new assets & investment swaps etc.
• For –ve mismatch,it can be financed from
market borrowings (Call/Term), Bills
rediscounting, Repos & deployment of foreign
currency converted into rupee.
18. STRATEGY
• To meet the mismatch in any maturity
bucket, the bank has to look into
taking deposit and invest it suitably
so as to mature in time bucket with
negative mismatch.
19. SUCCESS OF ALM IN BANKS :
PRE - CONDITIONS
1. Awareness for ALM in the Bank staff at all
levels–supportive Management & dedicated
Teams.
2. Method of reporting data from Branches/ other
Departments. (Strong MIS).
3. Computerization-Full computerization,
networking.
4. Insight into the banking operations, economic
forecasting,
computerization,
investment,
credit.
5. Linking up ALM to future Risk Management
Strategies.
20. Interest Rate Risk Management
• Interest Rate risk is the exposure of a bank’s
financial conditions to adverse movements
of interest rates.
• Though this is normal part of banking
business, excessive interest rate risk can
pose a significant threat to a bank’s
earnings and capital base.
• Changes in interest rates also affect the
underlying value of the bank’s assets,
liabilities and off-balance-sheet item.
21. Interest Rate Risk
• Interest rate risk refers to volatility in Net
Interest Income (NII) or variations in Net
Interest Margin(NIM).
• Therefore, an effective risk management
process that maintains interest rate risk
within prudent levels is essential to safety
and soundness of the bank.
22. Sources of Interest Rate Risk
• Interest rate risk mainly arises from:
– Gap Risk
– Basis Risk
– Net Interest Position Risk
– Embedded Option Risk
– Yield Curve Risk
– Price Risk
– Reinvestment Risk
