Management of Banks and Financial Institutions

Check out more papers on Financial Markets Interest Investment

Management of Banks and Financial Institutions CIA-2 Asset Liability Management Management of Assets and Liabilities by Banks [pic] Submitted By: Paul George 0921420 Caroline 0921440 Poornima 0921449 Sonal 0921454 Anvin 0921459 Meaning of ALM ALM is an attempt to match Assets and Liabilities, in terms of Maturities and Interest Rate Sensitivities, to minimize Interest Rate Risk and Liquidity Risk. • ALM can be termed as a risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities. It takes into consideration interest rates, earning power, and degree of willingness to take on debt and hence is also known as Surplus Management [pic] [pic] [pic] [pic] ALM and NIM • ALM is all about efficient management of balance sheet dynamics with regard to its size, constituents and quality. • It is the process of managing the Net Interest Margin (NIM) within the overall risk bearing ability of a bank • ALM process depends on the understanding of the balance sheet; the availability, accuracy, adequacy and expediency of the data and the MIS system DEFINITION OF ALM ALM is defined as, “the process of decision – making to control risks of existence, stability and growth of a system through the dynamic balances of its assets and liabilities. ” • The text book definition of ALM is “a risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities. It takes into consideration interest rates, earning power and degree of willingness to take on debt. It is also called surplus- management”. PURPOSE AND OBJECTIVES OF ALM ? Review the interest rate structure and compare the same to the nterest/product pricing of both assets and liabilities. ? Examine the loan and investment portfolios in the light of the foreign exchange risk and liquidity risk that might arise. ? Examine the credit risk and contingency risk that may originate either due to rate fluctuations or otherwise and assess the quality of assets ? Review,the actual performance against the projections made and analyse the reasons for any effect on spreads. ? Aim is to stabilise the short-term profits,long-term earnings and long-term substance of the bank.

The parameters that are selected for the purpose of stabilising asset liability management of banks are: -Net Interest Income(NII) -Net Interest Margin(NIM) -Economic Equity Ratio • Net Interest Income- Interest Income-Interest Expenses. • Net Interest Margin- Net Interest Income/Average Total Assets • Economic Equity Ratio- The ratio of the shareholders funds to the total assets measures the shifts in the ratio of owned funds to total funds. The fact assesses the sustenance capacity of the bank. RISKS INVOLVED IN ALM Various Risks involved in Asset-Liability Management are: – Interest Rate Risk – Foreign Exchange Risk – Liquidity Risk – Credit Risk – Contingency Risk MANAGEMENT OF LIQUIDITY RISK Liquidity Risk: It is the risk of having insufficient liquid assets to meet the liabilities at a given time. ? Stock Approach Stock Approach is based on the level of assets and liabilities as well as off balance sheet exposures on a particular date. • liquid assets to short term liabilities ratio • loan to deposits ratio ? Flow Approach • Measuring and managing net funding requirements. Managing Market Access • Contingency Planning MANAGEMENT OF INTEREST RATE RISK Interest Rate Risk: It is the risk of having a negative impact on a bank’s future earnings and on the market value of its equity due to changes in interest rates. Interest rate risk is the volatility in net interest income (NII) or in variations in net interest margin(NIM). Techniques: 1. Gap Analysis 2. Duration Gap Analysis 3. Simulation 4. Value at Risk GAP ANALYSIS One way to measure the direction and extent of asset-liability mismatch is by using gap analysis.

The analysis derives its name from the “gap” which is the difference between the amounts of Rate Sensitive Asset (RSA) and Rate Sensitive Liabilities (RSL). • Repricing gaps are calculated for assets and liabilities of differing maturities. • Positive gap indicates that assets get repriced before liabilities, whereas, a • Negative gap indicates that liabilities get repriced before assets. • The general formula that is used is as follows: NIIi = R i (GAPi) NII is the net interest income R refers to the interest rates impacting assets and liabilities in the relevant maturity bucket

GAP refers to the differences between the book value of the rate sensitive assets and the rate sensitive liabilities. DURATION MODEL Duration is an important measure of the interest rate sensitivity of assets and liabilities as it takes into account the time of arrival of cash flows and the maturity of assets and liabilities. It is the weighted average time to maturity of all the preset values of cash flows. Duration basically refers to the average life of the asset or the liability. SIMULATION Simulation models help to introduce a dynamic element in the analysis of interest rate risk.

Basically simulation models utilize computer power to provide what if scenarios, for example: What if: ? The. absolute level of interest rates shift Margins achieved in the past are not sustained/improved. VALUE AT RISK It enables the calculation of market risk of a portfolio for which no historical data exists. It enables one to calculate the net worth of the organization at any particular point of time so that it is possible to focus on long-term risk implications of decisions that have already been taken or that are going to be taken.

It is used extensively for measuring the market risk of a portfolio of assets and/or liabilities. THREE PILLARS OF ALM PROCESS The ALM process rests on Three Pillars: 1. ALM Information Systems 2. ALM Organization 3. ALM Process ALM INFORMATION SYSTEMS ALM Information Systems helps perform the following activities- • Decision Support and Reporting Tool • Comparison between different Branches • Product Analysis • Duration Gap Analysis • Risk Planning and Management • Flexible Design • Strategic Planning of the Asset-Liability Mix • Simulation Analysis • Transfer- Pricing Mechanism

ALM ORGANIZATION ALM Organization consists of the following: • Strong Commitment of Senior Management • ALCO should comprise the Senior Management (including the CEO) • A Support Group of Operational Staff ILLUSTRATION OF AN ALM ORGANIZATION- [pic] [pic] WORKING OF ALCO COMMITTEE [pic] ALM PROCESS The scope of ALM function can be described as follows: • Liquidity Risk Management • Management of Market Risks • Trading Risk Management • Funding and Capital Planning • Profit Planning and Growth Projection ASSET LIABILITY MANAGEMENT AT ICICI BANK [pic] [pic][pic] [pic] ----------------------- [pic]

Did you like this example?

Cite this page

Management of Banks and Financial Institutions. (2017, Sep 11). Retrieved March 28, 2024 , from
https://studydriver.com/management-of-banks-and-financial-institutions/

Save time with Studydriver!

Get in touch with our top writers for a non-plagiarized essays written to satisfy your needs

Get custom essay

Stuck on ideas? Struggling with a concept?

A professional writer will make a clear, mistake-free paper for you!

Get help with your assignment
Leave your email and we will send a sample to you.
Stop wasting your time searching for samples!
You can find a skilled professional who can write any paper for you.
Get unique paper

Hi!
I'm Amy :)

I can help you save hours on your homework. Let's start by finding a writer.

Find Writer