This document outlines an agenda and materials for a training session on asset liability management for Bangladesh Bank. The training covers key ALM concepts over 5 days, including introductions to ALM, liquidity risk, interest rate risk, and current Bangladesh Bank guidelines. Day 1 introduces ALM basics and liquidity risk concepts. Subsequent days cover liquidity risk, interest rate risk, and current regulatory frameworks. The document provides detailed breakdowns of bank balance sheets, including components of liabilities, assets, income, and expenses. It also discusses the importance of ALM for strategic management of liquidity risk and interest rate risk.
30. In this session, we will understand
what constitutes assets and
liabilities in a Bank and why asset
liability management is important
31. Asset Liability Asset liability
management is a
Management is strategic management
tool to measure and
concerned with manage liquidity risk,
strategic balance interest rate risk and
interest rate risk faced
sheet management by Banks and Financial
Institutions. ALM is
involving risks about matching of the
caused by changes assets and liabilities of
the balance sheet based
in interest rates, on maturity or re-pricing
for liquidity risk and
exchange rate and interest rate risk
the liquidity respectively
position of bank
32. ALM is the process It is a dynamic
involving decision process of Planning,
making about the Organizing &
composition of assets Controlling of Assets
and liabilities & Liabilities- their
including off balance volumes, mixes,
sheet items of the maturities, yields and
bank / FI and costs in order to
conducting the risk maintain liquidity
assessment and NII
33. Globalization of financial markets.
_ Deregulation of Interest Rates.
_ Multi-currency Balance Sheet.
_ Prevalence of Basis Risk and Embedded Option Risk.
_ Integration of Markets – Money Market, FOREX Market,
Government Securities Market.
_ Narrowing NII / NIM
_ Mismatches in the maturity profile of assets and liabilities
_ Banks borrow short term and lend long term-basis of
profitability
_ Mismatches in interest rates
34. Liquidity May lead to
mismatch→ liquidation
Interest rate Affects
mismatch → profitability
35. 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.
36. 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.
37. 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.
38. 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.
39. 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:
Net Interest Income (NII)
Net Interest Margin (NIM)
Economic Equity Ratio
40.
41. 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.
42. FLOW APPROACH STOCK APPROACH
Measuring & Based on the level of
Managing net Assets & Liabilities as
funding requirement well as Off balance
Sheet exposures on a
Managing market particular date and
access calculating certain
ratios to assess the
Contingency planning liquidity position
43.
44. COMPONENTS OF BALANCE SHEET
Liabilities Assets
Capital Cash and Balances
Reserves and at Central Bank
Surplus Investments
Deposits
Advances
Borrowings
Fixed Assets
Other Liabilities
and Provisions Other Assets
Contingent
Liabilities
45. Components of Liabilities … 1
1. Capital:
Capital represents owner’s
contribution/stake in the bank.
- It serves as a cushion for
depositors and creditors.
- It is considered to be a long term
sources for the bank.
46. Components of Liabilities … 2
2. Reserves & Surplus
Components under this head
includes:
I. Statutory Reserves
II. Capital Reserves
III. Investment Fluctuation Reserve
IV. Revenue and Other Reserves
V. Balance in Profit and Loss
Account
47. Components of Liabilities … 3
3. Deposits
This is the main source of bank’s
funds. The deposits are
classified as deposits payable on
‘demand’ and ‘time’. They
are reflected in balance sheet as
under:
I. Demand Deposits
II. Savings Bank Deposits
III. Term Deposits
48. Components of Liabilities … 4
4. Borrowings
(Borrowings include Refinance /
Borrowings from RBI,
Inter-bank& other institutions)
I. Borrowings in India
i) Bangladesh Bank
ii) Other Banks
iii) Other Institutions & Agencies
II. Borrowings outside India
49. 5. Other Liabilities & Provisions
It is grouped as under:
I. Bills Payable
II. Inter Office Adjustments (Net)
III. Interest Accrued
IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
V. Others(including provisions)
50. Components of Assets … 1
1. Cash & Bank Balances
I. Cash in hand
(including foreign currency
notes)
II. Balances with Bangladesh
Bank
In Current Accounts
In Other Accounts
51. Components of Assets … 2
2. BALANCES WITH BANKS AND
MONEY AT CALL & SHORT NOTICE
I. In Bangladesh
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. Outside Bangladesh
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
52. Components of Assets … 3
3. Investments
A major asset item in the bank’s balance sheet. Reflected
under 6 buckets as under:
I. Investments in Bangladesh in:
i) Government Securities
ii) Other approved Securities
iii) Shares
iv) Debentures and Bonds
v) Subsidiaries and Sponsored Institutions
vi) Others (Commercial Papers, COD & Mutual
Fund Units
etc.)
II. Investments outside Bangladesh in
Subsidiaries and/or Associates abroad
53. Components of Assets … 4
4. Advances
The most important assets for a bank.
A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans
repayable on demand
iii) Term Loans
B. Particulars of Advances :
i) Secured by tangible assets (including
advances against
Book Debts)
ii) Covered by Bank/ Government
Guarantees
iii) Unsecured
54. Components of Assets … 5
5. Fixed Asset
I. Premises
II. Other Fixed Assets (Including furniture
and fixtures)
6. Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at
source (Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in
satisfaction of claims
V. Deferred Tax Asset (Net)
VI. Others
55. Bank’s obligations
under LCs,
Contingent
Guarantees,
Acceptances on
Liability
behalf of constituents
and Bills accepted
by the bank are
reflected under this
heads.
56.
57. 1&2. Capital funds
a) Equity capital, Non- 4. Bonds and
redeemable or debentures
perpetual preference a) Plain vanilla
capital, Reserves, bonds/debentures
Funds and Surplus b) Bonds/debentures
b) Preference capital - with embedded
redeemable/non- call/put options
perpetual (including zero-
3. Grants, donations coupon/deep discount
and benefactions bonds)
5. Inter Corporate
Deposits:
58. 6. Borrowings c) Advance income
a) Short Term received, receipts
borrowings from borrowers
b) Long Term pending
Borrowings adjustment
7. Current d) Interest payable
liabilities and on bonds/deposits
provisions: e) Provisions for
a) Sundry creditors NPAs
b) Expenses f) Provision for
payable (other than Investments
interest) portfolio
g) Other provisions
59.
60. 1. Cash
2. Remittance in transit
3. Balances with banks (in India
only)
a) Current account
b) Deposit accounts/short term
deposits
61. 4. Investments (net of provisions)
a) Approved Trustee securities, government
securities, bonds, debentures and other
instruments
b) Unlisted securities (e.g. shares, etc.)
c) Unlisted securities having a fixed term
maturity
d) Venture capital units
e) Equity shares, convertible preference
shares, non-redeemable/perpetual preference
shares, shares of
subsidiaries/joint ventures and units in open
ended mutual funds and other investments.
62. 5. Advances (performing)
a) Bill of Exchange and
promissory notes discounted and
rediscounted
b) Term loans (rupee loans only)
c) Corporate loans/short term
loans
63. 6. Non-performing loans
(May be shown net of the provisions, interest
suspense held )
a) Sub-standard
i) All overdues and instalments of principal
falling due during the next three years
ii) Entire principal amount due beyond the
next three years
b) Doubtful and loss
i) All instalments of principal falling due
during the next five years as also all overdues
ii) Entire principal amount due beyond the
next five years
64. 7. Assets on lease
8. Fixed assets (excluding leased
assets)
9. Other assets
(a) Intangible assets and items not
representing cash inflows.
(b)Other items (such as accrued
income, other receivables, staff
loans, etc.)
65. C. Contingent liabilities
(a) Letters of credit/guarantees (outflow through
devolvement)
(b) Loan commitments pending disbursal (outflow)
(c) Lines of credit committed to/by other Institutions
(outflow/inflow)
Overdue for less than one month.
Interest overdue for more than one month but less than
seven months (i.e. before the relative amount
becomes NPA)
Principal installments overdue for 7 months but less
than one year
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80. Managing Currency risk is one more
dimension of Asset - Liability
Management. Mismatched currency
position besides exposing the
balance sheet to movements in
exchange rate also exposes it to
country risk and settlement risk.
81.
82. It is the current or prospective risk to earnings and
capital arising from adverse movements in currency
exchange rates.
It refers to the impact of adverse movement in
currency exchange rates on the value of open foreign
currency.
The banks are also exposed to interest rate risk,
which arises from the maturity mismatching of foreign
currency positions. Even in cases where spot and
forward positions in individual currencies are
balanced, the maturity pattern of forward transactions
may produce mismatches. As a result, banks may
suffer losses due to changes in discounts of the
currencies concerned
83. Banks also face another risk called
time-zone risk, which arises out of time
lags in settlement of one currency in
one center and the settlement of
another currency in another time zone.
The forex transactions with counter
parties situated outside Bangladesh
also involve sovereign or country risk.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115. LIQUIDITY NET STABLE
COVERAGE RATIO FUNDING RATIO
Objective is to examine Objective is to ensure
short term resiliency of longer term resiliency
liquidity risk profile to by funding activities
ensure they have with more stable
sufficient high quality funding on an on going
resources to survive structural basis
one month in acute
stress condition
116. The liquidity coverage ratio identifies the
amount of unencumbered, high quality liquid
assets an institution holds that can be used to
offset the net cash outflows it would encounter
under an acute short-term stress scenario
specified by supervisors. The specified scenario
entails both institution-specific and systemic
shocks built upon actual circumstances
experienced in the global financial crisis
117. The scenario entails:
• a significant downgrade of the institution’s
public credit rating;
• a partial loss of deposits;
• a loss of unsecured wholesale funding;
• a significant increase in secured funding
haircuts; and
• increases in derivative collateral calls and
substantial calls on contractual and
noncontractual off-balance sheet exposures,
including committed credit and liquidity
facilities.
118. The net stable funding (NSF) ratio measures the
amount of longer-term, stable sources of funding
employed by an institution relative to the liquidity
profiles of the assets funded and the potential for
contingent calls on funding liquidity arising from off-
balance sheet commitments and obligations.
The NSF ratio is intended to promote longer-term
structural funding of banks’ balance sheets, off-
balance sheet exposures and capital markets
activities.
119.
120.
121. Throughout the global financial crisis
which began in mid-2007, many banks
struggled to maintain adequate liquidity.
Unprecedented levels of liquidity support
were required from central banks in order
to sustain the financial system and even
with such extensive support a number of
banks failed, were forced into mergers or
required resolution.
122. These circumstances and events were
preceded by several years of ample liquidity
in the financial system, during which
liquidity risk and its management did not
receive the same level of scrutiny and
priority as other risk areas. The crisis
illustrated how quickly and severely
liquidity risks can crystallise and certain
sources of funding can evaporate,
compounding concerns related to the
valuation of assets and capital adequacy.
123. Banks should have in place
contingency and business
continuity plans to ensure their
ability to operate as going
concerns and minimize losses
in the event of severe business
disruption.
124. does does management
management have procedures
have a strategy in place for
for handling a accessing funds in
an emergency?
crisis?
125. A contingency plan needs to spell
out procedures to ensure that
information flows remain timely
and uninterrupted, and that they
provide senior management with
the precise information it needs in
order to make quick decisions.
126. Another major element in the plan
should be a strategy for taking
certain actions to
alter asset and liability behaviours.
127. Other components of the
contingency plan involve
maintaining customer
relationships with liability-
holders, borrowers, and trading
and off-balance-sheet
counterparties.
128. Contingency plans should also include
procedures for making up cash flow
shortfalls in adverse situations. Banks have
available to them several sources of such
funds, including previously unused credit
facilities. The plan should spell out as
clearly as possible the amount of funds a
bank has available from these sources, and
under what scenarios a bank could use
them.
129. The plan should spell out as clearly as
possible the amount of funds a bank has
available from these sources, and under
what scenarios a bank could use them.
Holding readily marketable securities
(financial assets). The sub-prime crisis has
exposed the shortcomings in such a strategy
for coping with market wide liquidity crises.
130. Holding securities which can be
pledged as collateral for short term
borrowings. The repurchase (repo)
market has become an important tool for
liquidity management of this sort.
Having in place lines of credit or other
arranged borrowing facilities. The Having
in place lines of credit or other arranged
borrowing facilities.
131. Having at-call or short term loans
outstanding to other entities which can be
called to provide cash when needed. The
risk here is that such loans involve
counterparty risk – and calling such loans
may increase the likelihood of default if
there is widespread stress in the financial
market.
132. For banks, the ability to access
“Lender of Last Resort” loans or
use discount window facilities at
Central Banks provide further
potential
133. new issues of short- and long-
term debt instruments
new capital issues, the sale of
subsidiaries or lines of business
asset securitisation
134. rapid asset growth, especially when
funded with potentially volatile
liabilities
• growing concentrations in assets or
liabilities
• increases in currency mismatches
• a decrease of weighted average
maturity of liabilities
135. • repeated incidents of positions
approaching or breaching internal or
regulatory limits
• negative trends or heightened risk
associated with a particular product
line, such as rising delinquencies
• significant deterioration in the bank’s
earnings, asset quality, and overall
financial condition
136. • negative publicity
• a credit rating downgrade
• stock price declines or rising debt
costs
• widening debt or credit-default-swap
spreads
• rising wholesale or retail funding
costs
137. • correspondent banks that eliminate or
decrease their credit lines
• increasing retail deposit outflows
• increasing redemptions of CDs before
maturity
• difficulty accessing longer-term
funding
• difficulty placing short-term
liabilities (eg commercial paper)
138. All banks are CFP are liquidity
required to stress tests designed
to quantify the likely
produce a
impact of an event on
Contingency the balance sheet
Funding Plan and the net potential
(CFP). These cumulative gap over a
plans are to be 3-month period.
approved by
ALCO
139. The bank's CFP If a CFP results in
should reflect the a funding gap within
funding needs of a 3-month time
the bank frame, the ALCO
must establish an
Reports of CFPs
action plan to
should be address this
prepared at least situation. The Risk
quarterly and Management
reported to ALCO Committee should
approve the action
140. CFPs under each Balance sheet
scenario must actions and
consider the impact incremental sources
of accelerated run off of funding should be
of large funds dimensioned with
providers. sources, time frame
The plans must
and incremental
consider the impact
of a progressive,
marginal cost and
tiered deterioration, included in the CFPs
as well as sudden, for each scenario.
drastic events.
141. Assumptions The ALCO will
underlying the CFPs, implement the CFP,
consistent with each amending it necessary,
scenario, must be to meet changing
reviewed and approved conditions daily
by ALCO. reports are to be
The Chief submitted to the
Executive/Chairman Treasury Head,
must be advised as comparing actual cash
soon as a decision has flows with the
been made to activate assumptions of the
or implement a CFP. CFP.