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MBA 2014-16: Term-VI
Asset Liability Management in Banks
(Faculty: Prof. Asit Ranjan Mohanty)
Banking institutions, which actively manage their risks, have a decisive
competitive advantage. Asset Liability Management (ALM) is a major
component of the overall risk management of an institution and typically
focuses on financial risks. A working definition of ALM, Asset-Liability
Management is the ongoing process of formulating, implementing,
monitoring, and revising strategies related to assets and liabilities in an
attempt to achieve financial objectives for a given set of risk tolerances and
constraints. It covers the set of techniques used to manage interest rate and
liquidity risks. It deals with the structure of the Balance Sheet subject to the
given constraints - internal, external and regulatory. ALM policies are
intended to keep liquidity and interest rate risks at an acceptable level given
expectation of future interest rates. Liquidity and interest rate policies are
interdependent since any projected liquidity gap will be funded at an
unknown rate.
The course would provide understanding of Measurement and Management
of Liquidity, Interest rate risk & Choosing assets and liabilities, which result
in the highest expected return on equity. This course will address the
different approaches for Value at Risk (VaR) in detail combining both asset
and liability products. The measurement of Economic Capital in the Banking
Book which is one of the important aspects of the Pillar II of the New
Revised Basel Framework will be addressed as Part of the Interest Risk
Management. The hands on exercises will trained the students to work in
the industry immediately.
Getting the right balance is always the challenge when banks and financial

institutions look at the issue of ALM. The objective of this course is to

rapidly builds the knowledge and skills in the ALM arena. All sessions are
reinforced with highly practical case studies and supported by real-world
computer simulation exercises.
This covers all the major approaches to the measurement and management
of structural risk and hedging techniques. The students will get an
opportunity to work through business case scenario and gain hands-on
experience of best practice risk analysis techniques. They will also e very
latest best practice risk analysis techniques and strategies.

Recommended Text:
Term Book
Management of Financial Institutions : Meera Sharma
Asset Liability Management : T.Ravi.kumar, Vision Books
Reference Material
Fundamentals of Risk Measurement : Marrison Chris, Tata
McGRAW-Edition 2005
Bank Asset Liability Management : Moorad Choudhry, Willey
Asset Liability Management Tools: A Hand Book of Best Practice by
Bernd Scherer , Risk Books
Guidelines for Implementation of the New Capital Adequacy
Framework(NCAF) April 2006: Reserve Bank of India Publication

Weights (%)

Two Quizzes


Mid Term


End Term


Class Participation (CP)

Class-participation is an integral component of the learning process. CP

includes the attendance & discipline in the classroom. The weight from
-20% to 0% will be given depending upon the above criteria.
The details of the content of the course are given below.
Module 1: Goals of ALM and ALM Process flow 1 session
Module 2: Liquidity Risk Management 3 Sessions
Module 3: Interest Risk Management & Economic Capital on account of
Interest Rate Risk(Through Mean Reversion Model) 4 Sessions
Module 4: Earning Analysis in ALM 4 Sessions
Module 5: Behavioral Models for Perpetual Products. Prepayment
Models 4 Sessions
Module 6 : The Economics of Securitization & its impact on Balance
Sheet - 2 Sessions
Module 7:What If Analysis and Fund Transfer Price (FTP) Mechanism of
Banks - 2 Sessions
Module 1 : Goals of ALM and ALM Process Flow
Session 1: Goals of ALM & ALM Roles and Responsibilities
Module 2 : Liquiduidity Risk Management
Session 2 to 4:
ALM Products
Contractual Computations
Tolerance & Coverage Ratio Analysis
Static Liquidity Ratios
Module 3: Interest Risk Management & Economic Capital on account
of Interest Rate Risk
Session 5 to 8:
Weighted Average Yield & Weighted Average Cost Distribution
Tolerance Analysis
Behavioral Analysis for Interest Rate Sensitivity Position of SB Account
Break Even Rate
Different Approaches to Value at Risk
Mean Reversion Model
Computation of Economic Capital

Module 4 : Earning Analysis in ALM

Session 9 to 12:
Earning at Risk (EaR) Analysis
Duration Gap Analysis
Market Value of Equity ( NPV & MDuration Approach)
Approaches Liquidity Risk Measurement

Module 5 : Behavioral Models for Perpetual Products. Prepayment

Session 13 to 16:
Behavioral Analysis for Perpetual Products (Curve Fitting Approach)
Prepayment Models ( PSA Model, OTS Model, Internal Model)
Off Balance Sheet Model (Internal Model)
Module 6 : The Economics of Securitization & its impact on Balance
Session 17 to 19:
Introduction to Securitisation
Process in Securitisation
Securitization and Capital Management
The Waterfall of Cash Flows and Losses
Implication of Securitisation on cost of funds for the Bank
Implication of Securitisation on Balance Sheet
CDO as an ALM Instrument
Module 7 : What If Analysis and Fund Transfer Price (FTP)
Mechanism of Banks
Session 19 to 20:
Change in Inertest Rate
Product Switch
Product Roll Over (Renewal of Deposits & Rollover of Loans
New Business
Prepayment of Loans,
Drawdown of Un drawn balances
Pre Mature Closure of deposits.
Balance Sheet Forecasting of Bank
Fund Transfer Price (FTP) Mechanism of Banks
Stress Test and Contingency Funding Plan for Banks
Hedging Strategy for On Balance Sheet Products

Code of Ethics
For individual quizzes/End term, it is unethical to seek any direct help
from others, whether or not you finally make use of the help.
Discussions among individuals either in class-room or in the
examination hall are completely forbidden. Those who will be
identified disturbing in the class will be asked to leave the class
immediately. No one is allowed to come to the class after the scheduled
start time. You should not carry either the Cell Phones & Laptops to the
I would also request you to give me continuous feedback. I would be in
the class room for some more time after the class is over to take up
your doubts and feed back. You may form a focus group (consisting of
6-7 students from the class with diverse backgrounds including the CR)
that continuously interacts with the students and informs me about
their problems, if any, with the course.
Contact Details
Though I am usually available in my office till late in the evening, it is
better to check beforehand. I also come to office on weekends and
would try to give you a weekend appointment if you need one. You can,
of course, always reach me by e-mail at My
Ext 995.
The scope of the course outline is not exhaustive to cover Asset Liability
Management in the Banks. Nevertheless care has been taken to ensure
that none of the important concepts remain untouched. By the time
students complete the course, they would realize that how the
Management of Assets & Liability is a never ending process.but they
will get good basic foundation on Asset Liability Management of the
Created By: Alora Kar on 13/08/2014 at 15:23
Category: BM-II T-VI Doctype: Document