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Asset Liability Management - Module A contd. - PowerPoint PPT Presentation


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ASSET-LIABILITY MANAGEMENT SYSTEM. ALM. Presented by c.s.balakrishnan. WHY ALM?. Globalisation of financial markets. Deregulation of Interest Rates. Multi-currency Balance Sheet. Prevalance of Basis Risk and Embedded Option Risk.

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asset liability management system

ASSET-LIABILITY MANAGEMENT SYSTEM

ALM

Presented by

c.s.balakrishnan

why alm
WHY ALM?
  • Globalisation of financial markets.
  • Deregulation of Interest Rates.
  • Multi-currency Balance Sheet.
  • Prevalance of Basis Risk and Embedded Option Risk.
  • Integration of Markets – Money Market, Forex Market, Government Securities Market.
  • Narrowing NII / NIM.
slide3
ALM
  • ALM is the process involving decision making about the composition of assets and liabilities including off balance sheet items of the bank / FI and conducting the risk assessment.
asset liability management
ASSET LIABILITY MANAGEMENT
  • Various risks affecting banks / FIs
    • Credit, Market, Operational
    • Deregulation & competition
  • Need to manage risk to protect NIM
  • Need for proper risk mgt policy
  • Liquidity planning, interest rate risk management
    • ALM guidelines issued for banks in Feb 1999 and for FIs in Dec 1999
concept of alm
Concept of ALM
  • ALM is concerned with strategic management of Balance Sheet by giving due weightage to market risks viz. Liquidity Risk, Interest Rate Risk & Currency Risk.
  • ALM function involves planning, directing, controlling the flow, level, mix, cost and yield of funds of the bank
  • ALM builds up Assets and Liabilities of the bank based on the concept of Net Interest Income (NII) or Net Interest Margin (NIM).
what is alm
WHAT IS ALM
  • ALM is concerned with strategic Balance Sheet management involving all market risks
  • It involves in managing both sides of balance sheet to minimise market risk
alm objectives
ALM Objectives
  • Liquidity Risk Management.
  • Interest Rate Risk Management.
  • Currency Risks Management.
  • Profit Planning and Growth Projection.
liquidity risk
LIQUIDITY RISK
  • What is liquidity risk?
    • Liquidity risk refers to the risk that the institution might not be able to generate sufficient cash flow to meet its financial obligations

EFFECTS OF LIQUIDITY CRUNCH

  • Risk to bank’s earnings
  • Reputational risk
  • Contagion effect
  • Liquidity crisis can lead to runs on institutions
    • Bank / FI failures affect economy
liquidity risk10
LIQUIDITY RISK
  • Factors affecting liquidity risk
    • Over extension of credit
    • High level of NPAs
    • Poor asset quality
    • Mismanagement
    • Non recognition of embedded option risk
    • Reliance on a few wholesale depositors
    • Large undrawn loan commitments
    • Lack of appropriate liquidity policy & contingent plan
liquidity risk11
LIQUIDITY RISK
  • Tackling the liquidity problem
    • A sound liquidity policy
    • Funding strategies
    • Contingency funding strategies
    • Liquidity planning under alternate scenarios
    • Measurement of mismatches through gap statements
liquidity risk12
LIQUIDITY RISK
  • METHODOLOGIES FOR MEASUREMENT
    • Liquidity index
    • Peer group comparison
    • Gap between sources and uses
    • Maturity ladder construction
liquidity risk13
LIQUIDITY RISK
  • RBI GUIDELINES
    • Structural liquidity statement
    • Dynamic liquidity statement
    • Board / ALCO
      • ALM Information System
      • ALM organisation
      • ALM process (Risk Mgt process)
    • Mismatch limits in the gap statement
    • Assumptions / Behavioural study
alm system
ALM SYSTEM
  • Liquidity Gap report – fortnightly
    • 1-14 d & 15 – 28 d – tolerance limit
    • Fix cumulative gap limits
  • IRS statements – monthly
    • Fix prudential limits
  • To compile currency wise liquidity and IRS reports
maturity profile liquidity
MATURITY PROFILE-LIQUIDITY
  • Outflows
    • Capital, Reserves & Surplus
    • Deposits
    • Borrowings and bonds
    • Other liabilities
maturity profile liquidity16
MATURITY PROFILE-LIQUIDITY
  • Inflows
    • Cash
    • Balance with RBI
    • Balance with other banks
    • Investments
    • Advances
irr relevance in india
IRR - Relevance in India
  • Deregulation of interest rates brought:
    • Volatility in rates - call, PLR, Govt. securities Yield Curve
    • Competition - free pricing of assets and liabilities
    • Pressure on NII / NIM, MVE
rsa rsl
RSA, RSL
  • RSA (Rate Sensitive Assets) – Assets whose value is dependent on current interest rate
  • RSL (Rate Sensitive Liabilities) – Liabilities whose value is dependent on current interest rate
gap mismatch risk
Gap/Mismatch Risk
  • It arises on account of holding rate sensitive assets and liabilities with different principal amounts, maturity/repricing rates
  • Even though maturity dates are same, if there is a mismatch between amount of assets and liabilities it causes interest rate risk and affects NII
alm organisation
ALM ORGANISATION

Three-tier organizational set-up for ALM Implementation :

  • Management Committee of the Board (MC)
    • Oversees the ALM implementation by ALCO
    • Reviews the ALM implementation periodically
    • Funding strategies for correcting the mismatches in ALM Statements.
asset liability management committee alco
ASSET-LIABILITY MANAGEMENT COMMITTEE (ALCO)

- ALCO headed by E.D.

- GM (T) – (Nodal Officer).

- GMs : Central Accounts, P&D, Credit, Risk Management International Division are the members.

- GM (IT) & AGM (Economist) are the invitees for ALCO meetings.

functions of alco
FUNCTIONS OF ALCO

Implementation of ALM System

  • Monitor the risk levels of the Bank.
  • Articulate the Interest Rate Position & fix interest rate on Deposits & Advances.
  • Fix differential rate of interest rate on Bulk Deposits.
  • Facilitating and coordinating to put in place the ALM System in the Bank.
alm statements to be submitted to rbi
ALM STATEMENTS TO BE SUBMITTED TO RBI
  • Statement of Structural Liquidity (Annexure - I) [DSB Statement No.8] - Rupee
  • Statement of Interest Rate Sensitivity (Annexure - II) [DSB Statement No. 9] - Rupee
  • Statement of Dynamic Liquidity (Annexure - III)
  • Statement of Maturity and Position (MAP) (Annexure - IV) [DSB Statement No.10 ] - Forex
  • Statement of Sensitivity to Interest Rate (SIR)(Annexure - V)[DSB Statement No.11] - Forex
tools for alm system
Tools for ALM System
  • Gap Analysis
  • Modified Gap Analysis
  • Duration Gap Analysis
  • Value at Risk (VaR)
  • Simulation
liquidity risks
LIQUIDITY RISKS
  • Broadly of three types:
  • Funding Risk: Due to withdrawal/non-renewal of deposits
  • Time Risk: Non-receipt of inflows on account of assets(loan installments)
  • Call Risk: contingent liabilities & new demand for loans
  • Dynamic liquidity is done to measure the liquidity risks
statement of structural liquidity
STATEMENT OF STRUCTURAL LIQUIDITY
  • Placed all cash inflows and outflows in the maturity ladder as per residual maturity
  • Maturing Liability: cash outflow
  • Maturing Assets : Cash Inflow
  • Classified in to 8 time buckets
  • Mismatches in the first two buckets not to exceed 20% of outflows
  • Banks can fix higher tolerance level for other maturity buckets.
addressing to mismatches
ADDRESSING TO MISMATCHES
  • Mismatches can be positive or negative
  • Positive Mismatch: M.A.>M.L. and vice-versa for Negative Mismatch
  • 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.
dynamic liquidity
DYNAMIC LIQUIDITY
  • Prepared every fortnight for ALCO
  • Projection is given for the next three months
  • Tools for assessing the day to day liquidity needs of the bank
statement of interest rate sensitivity
STATEMENT OF INTEREST RATE SENSITIVITY
  • Generated by grouping RSA,RSL & OFF-Balance sheet items in to various (8)time buckets.
  • Positive gap : Beneficial in case of rising interest rate
  • Negative gap: Beneficial in case of declining interest rate
calculation of nii nim
CALCULATION OF NII/NIM
  • NII: INT.EARNED-INT. EXPENDED
  • INT. EARNED: ADV+INVEST+BALANCE WITH RBI
  • INT. EXPENDED:DEPOSITS+INT. ON RBI BORROWINGS
  • NIM= (NII/TOT.EARNING ASSET)X100
success of alm in banks pre conditions
SUCCESS OF ALM IN BANKS :PRE - CONDITIONS
  • Awareness for ALM in the Bank staff at all levels–supportive Management & dedicated Teams.
  • Method of reporting data from Branches/ other Departments. (Strong MIS).
  • Computerization - Full computerization, networking.
  • Insight into the banking operations, economic forecasting, computerization, investment, credit.

5. Linking up ALM to future Risk Management Strategies.

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