Mcf 304 bank management
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MCF 304: Bank Management. Lecture 2.4 Assets & Liability Management. Assets & Liability Management. In managing the assets & liabilities of a bank, management must take into consideration the cost and rate of return of each source of fund when determining the right mix of fund.

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MCF 304: Bank Management

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Mcf 304 bank management

MCF 304: Bank Management

Lecture 2.4

Assets & Liability Management


Assets liability management

Assets & Liability Management

In managing the assets & liabilities of a bank, management must take into consideration the cost and rate of return of each source of fund when determining the right mix of fund.


Assets liability management1

Assets & Liability Management

Objectives;

To ensure bank liquidity

All demands for deposits withdrawals are met

Ensure sufficiency of fund to fulfill loan applications

To maintain the net interest margin and profitability of the bank


Fund gap management

Fund Gap Management

Managing the interest rates of bank’s assets and liabilities in consideration of the maturity features of the same assets and liabilities.

Fund Gap indicates total variable rate assets financed by fixed rate liabilities


Types of bank s assets liability management

Types of Bank’s Assets & Liability Management

Matching Rate

interest rates receivables from acquired assets exceeded the interest rates payable on liabilities

E.g, a three years loan tenure is finance by a deposit with two years tenure


Types of bank s assets liability management1

Types of Bank’s Assets & Liability Management

Variable Rate Asset

Involves the bank assets & liabilities with variable interest rates

Usually have short maturity period & interest rates are charges according to prevailing situations

If variable rate assets are matched with variable rate liabilities, the net profit margin can be maintain

Net profit margin = (interest received – interest paid) acquired assets


Variable rate asset

Variable Rate Asset

Variable Assets Rate

REPO

Short terms loans and investment

Variable rates terms loans

Variable Liabilities Rate

Short term deposits

REPO

NCD

Short term financing


Types of bank s assets liability management2

Types of Bank’s Assets & Liability Management

Fixed Rates

Matching fixed interest rates with longer maturity period

If fixed interest rates are matched against fixed rates liabilities, the net profit margin will change gradually over time as the value of fixed assets and liabilities change over time


Fixed rates

Fixed Rates

Fixed Rate Assets

Mortgages

Fixed rate term / installment loans

Leased assets

Long term investments

Fixed Rate Liabilities

Long term debt / liabilities

Minimum balances in current / savingaccounts

Capital funds


Fund gap management1

Fund Gap Management

Rising Interest Rates

Banks should have more variable assets which are financed by with fixed and low interest rates

Funds should be shifted towards short term investments while loans to variable rate

Highest Level

Fund gap is at its widest peak

Bank should move their funds to long term securities and fixed rate loans

Bank should shorten the maturity periods of their liabilities


Fund gap management2

Fund Gap Management

Declining Interest Rates

-Bank should narrow their funds gap by reducing variable rates assets which are financed by fixed rate liabilities

Lower Level Interest Rates

Fund gap is at their lowest level.

Bank should;

Extend the liability periods of liabilities

Shorten the maturity periods of investments

Limit fixed rate loans and procure short term debts

Encourage variable rate loans


Thank you

Thank You!

Izdihar Baharin @ Md Daud

Post Graduate Centre

HP: 006019-5170817

Email: [email protected]


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