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Caiib-Risk Management-Asset Liability Management - Module A
Caiib-Risk Management-Asset Liability Management - Module A
MANAGEMENT-
ASSET LIABILITY
MANAGEMENT –
MODULE A
12/07/21 1
BANKING BUSINESS ON
26.09.2008
figures in crores
DEMAND DEPOSITS 4,96,673
TERM DEPOSITS 29,45,465 34,42,138
CRR : 9
S L R : 25
TOTAL 34
HOW BANKS MANAGE
CREDIT & CASH TOTALLING 83.77 %
OF DEPOSITS
BORROWING TO DEPOSITS: 11.74 %
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PRESENT DAY PRORITIES
12/07/21 5
ASSET LIABILITY MANAGEMENT
ENSURE ACCEPTABLE NII / NIM AND
LONG TERM IMPROVEMENT IN NET
WORTH FOR A GIVEN RISK LEVEL
INCLUDES PLANNING, ACQUIRING AND
DEPLOYING FUNDS FOR ABOVE
PURPOSE
IT IS ONGOING PROCESS OF
FORMULATING, MONITORING,
REVISING AND FRAMING STRATEGIES
RELATED TO ASSETS AND LIABILITIES
12/07/21 6
ALM Contd…
ENCOMPASSES MANAGEMENT OF
LIQUIDITY AND INTEREST RISKS
AVOIDS VOLATILITY, HELPS PRODUCT
INNOVATION AND COMPLIANCE OF
REGULATIONS
IN REGULATED ENVIRONMENT IT IS
DAY TO DAY FUND MANAGEMENT
FUNCTION ONLY
12/07/21 7
ALM Contd..
FROM BALANCE SHEET ANGLE
RESERVE MAINTENANCE
LIABILITY MANAGEMENT
ASSET MANAGEMENT
INVESTMENT MANAGEMENT
CAPITAL MANAGEMENT
LIQUIDITY MANAGEMENT
FROM P&L ANGLE
SPREAD MANAGEMENT
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ALM- FUNDS MANAGEMENT
12/07/21 9
LIQUIDITY MANAGEMENT
12/07/21 10
HOW LIQUIDITY GETS AFFECTED
12/07/21 11
LIQUIDITY MANAGEMENT
12/07/21 12
LIQUIDITY MANAGEMENT
12/07/21 13
LIUQUIDITY MANAGEMENT
CRYSTALLISATION OF CONTINGENCIES
12/07/21 14
FOREIGN CURRENCY LIQUIDITY
MANAGEMENT- PROCESS
12/07/21 15
LIQUIDITY MANAGEMENT
12/07/21 16
DIFFERENT APPROACHES TO
LIQUIDITY MANAGEMENT
STOCK APPROACH & FLOW A PPROACH
IN FLOW APPROACH INFLOWS AND
OUTFLOWS ARE MEASURED FOR
DIFFERENT TIME BUCKETS AND UNDER
DIFFERENT SCENARIOS LIKE
NORMAL TIMES, BANK SPECIFIC CRISIS
AND SYSTEMIC CRISIS AND FUNDING
AVENUES IDENTIFIED
12/07/21 17
RBI GUIDELINES
GROUP LIKELY INFLOWS AND
OUTFLOWS INTO DIFFERENT TIME
BUCKETS AND PRESCRIBING MAX
MISMATCH IN NEAR TERM BUCKETS
1 DAY 5%
2-7 DAYS 10%
8-14 DAYS 15%
5-28 DAYS 20%
PERCENTAGES ARE MAX. FOR
RESPECTIVE TIME BUCKET
12/07/21 18
INTEREST RISK MANAGEMENT
RISK OF INT. INC. GETTING AFFECTED
DUE TO EXTERNAL FACTORS ONLY
MARKET INTEREST RATES AND
REGULATORY INTEREST RATES
IMPACT WILL BE ON BOTH ADVANCES
AND INVESTMENTS
LIQUIDTY AND INTEREST RISK ARE NOT
EXCLUSIVE
NOT ALL ASSETS OR LIAB. WILL BE
IMPACTED
12/07/21 19
INTEREST RISK MANAGEMENT
12/07/21 20
INTEREST RISK Contd…
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GAP ANALYSIS
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ADJUSTED DURATION
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MODIFIED DURATION
MODIFIED DURATION (MD) IS USED TO
STUDY THE CHANGE IN PRICE OF AN
ASSET DUE TO A CHANGE IN INTEREST
RATE
MD = D/ (1+ r) AND
PC = - MD* Δ r / 100
PC IS CHANGE IN PRICE AND Δ r IS
CHANGE IN INTEREST RATE IN BASIS
POINTS AND THIS IS USEFUL ONLY IN
CASE OF SMALL CHNGES IN INTEREST
RATES
12/07/21 26
MANAGEMENT OF FOREX RISK
TRANSACTION EXPOSURE
CURRENCY RISK IN SPECIFIC FOREX
TRANSACTION BETWEEN EXECUTION
AND SETTLEMENT
TRANSLATION EXPOSURE
CURRECNY RISK INVOLVED AT THE
TIME OF REPORTING TRANSACTIONS
AT THE END OF ACCOUNTING YEAR
TO H.O.
OPERATING EXPOSURE
12/07/21 27
FOREX RISK MGMT. TOOLS
FORWARDS
FUTURES-CURRENCY
OPTIONS
SWAPS
MONEY MARKET INSTRUMENTS
MONEYMARKETINSTRUMENTS CAN BE
USED LIKE A FORWARD CONTRACT
INMGMT. OF FOREX RISK
12/07/21 28
RISK MGMT. IN DEALING ROOM
OPEN POSITION
OVERNIGHT AND DAY LIGHT LIMITS
STOP LOSS LIMITS
CAP ON SIZE OF TRANSACTION
12/07/21 29
TWO PRACTICAL PROBLEMS
ON DURATION ANALYSIS
1. ASSETS AND LIABILITIES OF FMG FINANCES
ALONGWITH THEIR DURATION AND INTEREST
RATRES ARE AS PER GIVEN TABLE. IDENTIFY RISK
SENSITIVEGAP AND NIM. DURING AFORECASTING
PERIOD OF 1YEAR IF INTEREST RATES FALL BY 2 %
WHAT WOULD BE IMPLICATION ON NIM
2. ABC BANK HAS EARNING ASSETS AMNOUNTING TO
Rs 1980 CRORES AND THEIR NIM IS 4%.
MANAGEMENT’S POLICY SAYS THAT A 2.5%
DEVIATION FROM NIM IS ACCEPTABLE. BANK
FORECASTS THAT INTEREST RATES WOULD
INCREASE BY 0.75% DURING NEXT12 MONTHS.
WHAT SHOULD BE THE GAP OF THE BANK IF THEY
HAVE TO BE WITHIN THE GIVEN RANGE OF NIM
12/07/21 30
OBJECTIVE QUESTIONS
1. THE NEED TO REPLACE NET OUTFLOWS
DUE TO UNANTICIPATED WITHDRAWAL OF
DEPOSITS IS KNOWN AS ---------RISK.
2. THE NEED TO COMPENSATE FOR NON-
RECEIPT OF EXPECTED INFLOWS OF
FUNDS IS CLASSIFIED AS -----RISK.
3. CALL RISK ARISES DUE TO
CRYSTALLISATION OF ------.
4. MATURITY LADDERS ENABLES THE BANK
TO ESTIMATE THE DIFFERENCE
BETWEEN-----AND------IN PREDETERMINED
PERIODS.
12/07/21 31
OBJECTIVE QUESTIONS
Q. THE INSTITUTION IS IN A POSITION TO BENEFIT
FROM RISING INTEREST RATES WHEN ASSETS
ARE ……………THAN LIABILITIES.
A. LESSER.
B. GREATER
C. EQUAL
D. HALF.
Q. THE LIQUIDITY RISK ARISING OUT OF
UNANTICIPATED WITHDRAWAL OR NON
RENEWAL OF DEPOSITS IS CALLED AS
A. FUNDING RISK.
B. TIME RISK.
C. MARKET RISK
D. OPERATIONAL RISK.
12/07/21 32
OBJECTIVE QUESTIONS
Q.LIQUIDITY RISK ARISING OUT OF CRYSTALLIZATION
OF LIABILITIES AND CONVERSION OF NON FUND
BASED LIMITS TO FUND BASED LIMITS IS KNOWN AS
A. CALL RISK.
B. TIME RISK.
C. OPERATIONAL RISK.
D. MARKET RISK.
Q. STOCK APPROACH OF MEASURING AND MANAGING
LIQUIDITY RISK AND FUNDING REQUIREMENTS IS
BASED ON
A. LEVEL OF ASSETS AND LIABILITIES AND BALANCE
SHEET EXPOSURE ON A PARTICULAR DATE.
B. BASED ON STOCKS PLEDGED TO BANK IN CASH
CREDIT ACCOUNT
C. STOCK OF INVESTMENTS OF BANK.
D. NONE OF ABOVE.
12/07/21 33
OBJECTIVE QUESTIONS
Q. UNDER GAP METHOD THE NET FUNDING
A. FOUR.
B. THREE
C. FIVE .
D. NONE OF ABOVE.
12/07/21 35
OBJECTIVES
Q. CAPITAL , RESERVES AND SURPLUS ARE SLOTTED
IN WHICH TIME BUCKET IN STRUCTURAL LIQUIDITY
STATEMENT:
A. OVER 5 YEARS.
B. OVER 3 YEARS.
C. OVER 1 YEAR.
D. OVER 6 MONTHS.
12/07/21 36
OBJECTIVES
Q. WHAT IS BASIS RISK:
12/07/21 37
OBJECTIVES
Q. HIGHER THE DURATION IMPLIES THAT A GIVEN CHANGE
IN THE LEVEL OF INTEREST RATES WILL HAVE
A. LARGER IMPACT ON ECONOMIC VALUE.
B. SMALLER IMPACT ON ECONOMIC VALUE.
C. NO IMPACT.
D. NONE OF ABOVE.
Q. DURATION WILL BE HIGHER IF
A. LONGER THE MATURITY DATE OR SMALLER THE
PAYMENTS THAT OCCUR BEFORE MATURITY ( COUPON
PAYMENTS)
B. SHORTER THE MATURITY AND HIGHER THE
PAYMENTS THAT OCCUR BEFORE MATURITY ( COUPON
PAYMENTS)
C. NONE OF ABOVE.
D. ALL THE ABOVE.
12/07/21 38
OBJECTIVES
Q. SHORT TERM DYNAMIC LIQUIDITY STATEMENT RELATE
TO
A. MONITORING LIQUIDITY ON DYNAMIC BASIS OVER A TIME
HORIZON OF 1-90 DAYS.
B. MONITORING LIQUIDITY ON DYNAMIC BASIS OVER A TIME
HORIZON OF 7-90 DAYS.
C. MONITORING LIQUIDITY ON DYNAMIC BASIS OVER A TIME
HORIZON OF 28-90 DAYS.
D. NONE OF ABOVE.
Q. IN STATEMENT OF INTEREST RATE SENSITIVITY :
A. ONLY RUPEE ASSETS AND LIABILITIES AND OFF BALANCE
SHEET POSITIONS SHOULD BE REPORTED.
B. ALL ASSETS AND LIABILITIES SHOULD BE REFLECTED.
C. ONLY FOREIGN CURRENCY ASSETS AND LIABILITIES
SHOULD BE REFLECTED.
D. NONE OF ABOVE.
12/07/21 39
THANQ
12/07/21 40