I, the undersigned hereby declared that the Project Report entitled “ASSET LIABILITY MANAGEMENT” written and submitted by me to the university of JAMIA HAMDARD, New Delhi in partial fulfilment of the requirement of the award degree of MASTER OF BUSINESS ADMINISTRATION under the guidance of MR. AREEB KHAN is my original work and the conclusions drawn therein are based on the materials collected by myself.



1. Executive Summary 2. Introduction 3. Review of Literature 4. Asset Liability Management in Banks 5. Asset Liability Information System i. ii. iii. iv. ALM Organisation Composition of ALCO Composition of Directors ALM Process

6. Organisation Structure of ALM 7. Composition of assets and liabilities in Banks and their management 8. ALM strategies for correcting mismatch 9. Study of ALM in Indian Banks i. ii. iii. iv. v. Objectives Methodology Reclassification of assets and liabilities Canonical correlation analysis Observation

vi. Securitisation to reduce ALM gap in Banks by 23% . ALM in Banks – A CASE OF KUWAIT 16. Foreign Banks Private Banks Nationalized Banks SBI& Associates Profitability analysis of Banks 10. Suggestions 18. Reasons for growing significance of ALM 12. viii. vii.a report 14. References 19. Information Technology and ALM in Indian context 11. Purpose and Objective of ALM 13. x. RBI guidelines 15. DO’S and DONT’S . Conclusion 17. ix.



Assessing and managing the market risk is also a complex activity. threaten the survival of institution. Changes in market liquidity and or interest rates exposes banks/ business to the risk of loss. Banks and other financial institutions are in the business of taking on risk. an art as old as banking itself. The types of risk exposure taken on can be subtle and complex. where it is absolutely necessary for the management of the bank to understand the existence of such risk and best manage the exposure to the risk. Banks’ are exposed to Balance Sheet Risk. The two risks frequently overlap and the ALM discipline recognizes this by overseeing both risks concurrently. The Asset Liability Committee (ALCO). as well as off-balance sheet business. In managing these risks. using their expertise in risk valuation to generate return. it is important that senior management as well as the Board of Directors must understand the existence of such risk on the balance sheet and they should ensure that the structure of the institutions’ business and the level of balance sheet risk it assumes are effectively managed. reflecting not only the individual products themselves. no single measurement or ratio gives the complete picture.EXECUTIVE SUMMARY Bank asset and liability management(ALM). and that resources are available for evaluating and controlling interest rate risk. is a cornerstone of financial market risk management. Therefore when assessing risk exposure it is important to consider bank’s balance sheet as a whole. A bank’s ALM committee (ALCO) will take just this approach managing the banks assets and liabilities and being responsible for overseeing liquidity and market risk at the highest level. is primarily responsible for Balance Sheet Management or more specifically Balance Sheet Risk Management. As such. in extreme cases. but also interacting with external factors. INTRODUCTION . comprising of the senior management of a bank. To assess the liquidity risk we need to consider the entire balance sheet. Increasingly Asset Liability Management has become an integral part of Bank Management. that appropriate policies and procedures are established to control and limit these risks. which may.

But now.Asset Liability Management (ALM) defines management of all assets and liabilities (both off and on balance sheet items) of a bank. Risk Management and Basel Accord introduced by BIS depends on the efficiency of the management of assets and liabilities. Hence these days without proper management of assets and liabilities. BIS is standardizing the practices of banks across the globe and India is part of this process. The success of ALM. But the nature. To view the two sides of banks’ balance sheet as completely integrated units has an intuitive appeal. profitability and risk of constituents of both sides should be similar. The structure of banks’. It requires assessment of various types of risks and altering the asset liability portfolio to manage risk. borrowings and capital. the RBI did the real banking business and commercial banks were mere executors of what RBI decided. balance sheet has direct implications on profitability of banks especially in terms of Net Interest Margin (NIM). So it is absolute necessary to maintain compatible assetliability structure to maintain liquidity. . On the other side pf the balance sheets are assets which are loans of various types which banks make to the customer for various purposes. A bank’s liabilities include deposits. Till the early 1990s. the survival is at stake. improve profitability and manage risk under acceptable limits.


ALM was pioneered by financial institutions. Doing so disguised possible risks arising from how the assets and liabilities were structured. Suppose.030) = 103. This article describes ALM as a general concept. at the end of a year. the bank will have to find new financing for the loan.0MM. It is going to be earning 3. The respective market values of the bank's asset and liability are: . If interest rates have risen.00% on its financing. At the end of a year.20% to a highly-rated borrower for 5 years. The net transaction appears profitable—the bank is earning a 20 basis point spread—but it entails considerable risk. banks and insurance companies used accrual accounting for essentially all their assets and liabilities. bonds or real estate. an applicable 4-year interest rate is 6. which will have 4 more years before it matures. They would take on liabilities. The book value of the loan (the bank's asset) is: 100MM(1.20 it is earning on its loan. assume interest rates are annually compounded and all interest accumulates to the maturity of the respective obligations. Traditionally. Accrual accounting does not recognize the problem. The book value of the financing (the bank's liability) is: 100MM(1. [2 ] [1 ] Based upon accrual accounting. such as deposits.20% on its loan and paying 6. the bank may have to pay a higher rate of interest on the new financing than the fixed 3. starting with more traditional usage. It is used in slightly different ways in different contexts.2MM. All assets and liabilities were held at book value. The bank is in serious trouble.REVIEW OF LITERATURE Asset-liability management (ALM) is a term whose meaning has evolved. life insurance policies or annuities.032) = 103.000 in the first year.00% for a year and lends the same money at 3. For simplicity.00%. but corporations now also apply ALM techniques. Consider a bank that borrows USD 100MM at 3. the bank earned USD 200. They would invest the proceeds from these liabilities in assets such as loans. Market value accounting recognizes the bank's predicament.

accrual accounting will recognize a similar loss. banks could earn a spread by borrowing short and lending long. it had to demutualize and was acquired by the Axa Group. So which result offers a better portrayal of the bank' situation. The Equitable sold a number of long-term guaranteed interest contracts (GICs) guaranteeing rates of around 16% for periods up to 10 years. so losses due to asset-liability mismatches were small or trivial. Things started to change in the 1970s. Many firms intentionally mismatched their balance sheets. The problem in this example was caused by a mismatch between assets and liabilities. Equitable invested the assets short-term to earn the high interest rates guaranteed on the contracts. which ushered in a period of volatile interest rates that continued into the early 1980s. The bank will have to secure financing for the loan at the new higher rate. was abandoned to stem a migration overseas of the market for USD deposits. were slow to recognize the emerging risk. and the market-value loss reflects this. with short-term interest rates spiking into the high teens. It was that capital might be depleted by narrowing of the difference between assets and liabilities—that the values of assets and liabilities might fail to move in tandem.030) = 103. Short-term interest rates soon came down. GICs were routinely for principal of USD 100MM or more.28MM. Asset-liability risk is a leveraged form of risk. During the early 1980s. such mismatches tended not to be a significant problem. the USD yield curve was inverted. Firms gradually accrued the losses over the subsequent 5 or 10 years. so small percentage changes in assets or liabilities can translate into large percentage changes in capital. Some firms suffered staggering losses. During this period. The problem was not that the value of assets might fall or that the value of liabilities might rise. US regulation Q. who were accustomed to thinking in terms of accrual accounting. Ultimately. Prior to the 1970's. managers of financial firms focused on asset-liability risk. the result was not so much bankruptcies as crippled balance sheets. Because the firms used accrual accounting. the accrual accounting profit or the market-value accounting loss? The bank is in trouble. The firm was crippled. the bank has lost USD 10. When the Equitable had to reinvest. From a market-value accounting standpoint. so it will accrue the as-yet unrecognized loss over the 4 remaining years of the position. Managers of many firms. Because yield curves were generally upward sloping. which had capped the interest rates that banks could pay depositors. Interest rates in developed countries experienced only modest fluctuations. Eventually. Increasingly. One example is the US mutual life insurance company the Equitable.0MM. it couldn't get nearly the interest rates it was paying on the GICs.100MM(1. The capital of most financial institutions is small relative to the firm's assets or liabilities. .

Ten or twenty scenarios might be specified in all. Both approaches worked well if assets and liabilities comprised fixed cash flows. rising rate's. the capital falls by over 50%. With scenario analysis. Over the period shown. In this example. the assets and liabilities change only slightly. Example: Asset-Liability Risk Exhibit 1 Asset-liability risk is leveraged by the fact that the values of assets and liabilities each tend to be greater than the value of capital. such as those embedded in mortgages or callable debt. Assumptions might include prepayment rates on mortgages or surrender rates on insurance products. posed problems that gap analysis could not address. Duration analysis could address these in theory. Accrual accounting could disguise the problem by deferring losses into the future. but those slight changes dramatically reduce the company's capital (which. Firms responded by forming asset-liability management (ALM) departments to assess asset-liability risk. Assumptions might also be made about . inverted yield curves. In Exhibit 1. Scenarios might specify the behavior of the entire yield curve. They established ALM committees comprised of senior managers to address the risk. for the purpose of this example. Next. etc. several interest rate scenarios would be specified for the next 5 or 10 years. These might assume declining rates. modest fluctuations in values of assets and liabilities result in a 50% reduction in capital. assumptions would be made about the performance of assets and liabilities under each scenario. but implementing sufficiently sophisticated duration measures was problematic. but it could not solve the problem. banks and insurance companies also performed scenario analysis. Options. Accordingly. is defined as the difference between assets and liabilities).Exhibit 1 illustrates the evolution over time of a hypothetical company's assets and liabilities. These facilitated techniques of gap management and duration matching of assets and liabilities. a gradual decrease in rates followed by a sudden rise. a development that would threaten almost any institution. so there could be scenarios with flattening yield curves. Techniques for assessing asset-liability risk came to include gap analysis and duration analysis. etc.

This not only reduces asset-liability risk. ALM departments are addressing (nontrading) foreign exchange risks and other risks. airlines' hedging of fuel prices or manufacturers' hedging of steel prices are often presented as ALM. They are using related techniques to address commodities risks. a gap analysis can be used for cash flow analysis. Techniques of ALM have also evolved. etc. Corporations have adopted techniques of ALM to address interest-rate exposures. A shortcoming of scenario analysis is the fact that it is highly dependent on the choice of scenarios. With minimal modification. In financial firms. the performance of the firm's balance sheet could be projected under each scenario. financial firms are increasingly using market-value accounting for certain business lines. the assessment and management of liquidity risk became a second function of ALM departments and ALM committees.the firm's performance—the rates at which new business would be acquired for various products. ALM is associated with those assets and liabilities—those business lines—that are accounted for on an accrual basis. market risk limits. Scenario analysis can easily be used to assess liquidity risk. It was a necessary substitute because many of the assets and liabilities of financial institutions could not—and still cannot—be marked to market. Based upon these assumptions. Firms recognized a potential for liquidity risks to be overlooked in ALM analyses. liquidity risk and foreign exchange risk. Accordingly. Today. This spirit of marketvalue accounting was not a complete solution. ALM has extended to non-financial firms. Today. Also. A significant development has been securitization. It includes essentially all traditional insurance activities. The growth of OTC derivatives markets have facilitated a variety of hedging strategies. For example. it also frees up the balance sheet for new business. ALM has evolved since the early 1980's. Others are compatible with cashflow analysis. A firm can earn significant mark-to-market profits but go bankrupt due to inadequate cash flow. They also recognized that many of the tools used by ALM departments could easily be applied to assess liquidity risk. It also requires that many assumptions be made about how specific assets or liabilities will perform under specific scenarios. which allows firms to directly address asset-liability risk by removing assets or liabilities from their balance sheets. Today. The scope of ALM activities has widened. the ALM committee might adjust assets or liabilities to address the indicated exposure. In a sense. Some techniques of ALM—such as duration analysis—do not address liquidity issues at all. For trading books. This is true of universal banks that have trading operations. ALM was a substitute for market-value accounting in a context of accrual accounting. This includes bank lending and deposit taking. liquidity risk management is generally considered a part of ALM. If projected performance was poor under specific scenarios. ASSET LIABILITY MANAGEMENT IN BANKS . techniques of market risk management—value-at-risk (VaR).—are more appropriate than techniques of ALM.

This note lays down broad guidelines in respect of interest rate and liquidity risks management systems in banks which form part of the Asset-Liability Management (ALM) function. The initial focus of the ALM function would be to enforce the risk management discipline viz. driven by corporate strategy. liquidity risk and operational risks. profitability and long-term viability. These pressures call for structured and comprehensive measures and not just ad hoc action. The Management of banks has to base their business decisions on a dynamic and integrated risk management system and process. together with increasing volatility in the domestic interest rates as well as foreign exchange rates. has brought pressure on the management of banks to maintain a good balance among spreads. ALM information systems Information is the key to the ALM process. adequacy and expediency • ALM organisation => Structure and responsibilities => Level of top management involvement • ALM process => Risk parameters => Risk identification => Risk measurement => Risk management => Risk policies and tolerance levels. Banks are exposed to several major risks in the course of their business credit risk. The objective of good risk management programmes should be that these programmes will evolve into a strategic tool for bank management. foreign exchange risk. Considering the large network of branches and the lack of an adequate system to collect information required for ALM which analyses . The ALM process rests on three pillars: • ALM information systems => Management Information System => Information availability. managing business after assessing the risks involved. Intense competition for business involving both the assets and liabilities. interest rate risk. accuracy.Over the last few years the Indian financial markets have witnessed wide ranging changes at fast pace. equity / commodity price risk.

Towards this end. The ALCO would also articulate the current interest rate view of the bank and base its decisions for future business strategy on this view. Individual banks will have to decide the frequency for holding their ALCO meetings. c) The ALM desk consisting of operating staff should be responsible for analysing. monitoring and reporting the risk profiles to the ALCO. the ALCO should review the results of and progress in implementation of the decisions made in the previous meetings. it will have to develop a view on future direction of interest rate movements and decide on a funding mix between fixed vs floating rate funds. In addition to monitoring the risk levels of the bank. Eachbank will have to decide on the role of its ALCO. desired maturity profile of the incremental assets and liabilities. interest rate. b) The Asset . its responsibility would be to decide on source and mix of liabilities or sale of assets. The problem of ALM needs to be addressed by following an ABC approach i. investment portfolio and money market operations.Liability Committee (ALCO) consisting of the bank's senior management including CEO should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the bank (on the assets and liabilities sides) in line with the bank's budget and decided risk management objectives. it would be much easier to collect reliable information. The data and assumptions can then be refined over time as the bank management gain experience of conducting business within an ALM framework. The spread of computerisation will also help banks in accessing data. Composition of ALCO .information on the basis of residual maturity and behavioural pattern it will take time for banks in the present state to get the requisite information. will include product pricing for both deposits and advances. inter alia. The ALCO is a decision making unit responsible for balance sheet planning from risk return perspective including the strategic management of interest rate and liquidity risks. for instance. In respect of foreign exchange. ALM organisation a) The Board should have overall responsibility for management of risks and should decide the risk management policy of the bank and set limits for liquidity. etc. foreign exchange and equity price risks. etc. wholesale vs retail deposits. The business and risk management strategy of the bank should ensure that the bank operates within the limits / parameters set by the Board. The business issues that an ALCO would consider. in view of the centralised nature of the functions. analysing the behaviour of asset and liability products in the top branches accounting for significant business and then making rational assumptions about the way in which assets and liabilities would behave in other branches. money market vs capital market funding. The staff should also prepare forecasts (simulations) showing the effects of various possible changes in market conditions related to the balance sheet and recommend the action needed to adhere to bank's internal limits.e. In respect of the funding policy. its responsibility as also the decisions to be taken by it. domestic vs foreign currency funding.

International Banking and Economic Research can be members of the Committee. the CEO/CMD or ED should head the Committee. To ensure commitment of the Top Management. ALM process The scope of ALM function can be described as follows: • Liquidity risk management • Management of market risks (including Interest Rate Risk) • Funding and capital planning • Profit planning and growth projection • Trading risk management ORGANISATIONAL STRUCTURE OF ALM CEO Managing Director Head of Consumer Banking Head of Treasury . Some banks may even have sub-committees. business mix and organisational complexity. In addition the Head of the Information Technology Division should also be an invitee for building up of MIS and related computerisation. Committee of Directors Banks should also constitute a professional Managerial and Supervisory Committee consisting of three to four directors which will oversee the implementation of the system and review its functioning periodically. Funds Management / Treasury (forex and domestic).The size (number of members) of ALCO would depend on the size of each institution. The Chiefs of Investment. Credit.

Head of Corporate Banking Head of Finance Head of Credit Head of Operations Head of ALM Treasury Money Market Dealers Responsible of ALM COMPONENTS OF ASSET’S & LIABILITIES IN BANK’S BALANCE SHEET & THEIR MANAGEMENT Banks liabilities:The sources of funds for the lending and investment activities constitute liabilities side of the balance sheet. Capital Reserves & Surplus .

. the financial institution has enough assets. In addition ALM requires an understanding of the market area in which bank operates. It is more than just managing individual assets and liabilities. It is an integrated approach to banks financial management requiring simultaneous decision about types and amount of financial assets and liabilities it holds or its mix and volume. it may become temporarily insolvent due to a severe liquidity crisis. Though. Investments Advances Fixed Assets Other Assets ALM is about management of Net Interest Margin (NIM) to ensure that its level and riskiness are compatible with risk/return objectives of bank. Cash and Bank balances with Reserve Bank of India. Balances with banks and money at call and short notice. If 50% of the liabilities are maturing within 1 year but only 10% of the assets are maturing within the same period.Deposits Borrowings Other liabilities & Provisions Contigent Liabilities Banks assets:Are the funds mobilised by banks through various sources.

debentures and accessing long term debt like bank borrowings and term loans. ALM IS REQUIRED TO MATCH ASSETS AND LIABILITIES AND MINIMISE LIQUIDITY AS WELL AS MARKET RISK. Asset driven strategies for correcting the mismatch focus on shortening the duration of the asset portfolio. . Such strategies can include for instance issue of external equity in the form of additional equity shares or compulsorily convertible preference shares (which can also help in augmenting the Tier I capital of finance companies). subordinated debt instruments. Liability driven strategies basically focus on lengthening the maturity profiles of liabilities. Strategies to be employed for correcting a mismatch in the form of D(A) < D(L) (which will be necessary if interest rates are expected to decline) will be the reverse of the strategies discussed above. issue of redeemable preference shares. The commonlyemployed asset based financing strategy is securitization. Typically the long-term asset portfolios like the lease and hire purchase portfolios aresecuritized.THUS . Asset-liability management strategies for correcting mismatch The strategies that can be employed for correcting the mismatch in terms of D(A)> D(L) can be either liability or asset driven. and the resulting proceeds are either redeployed in short term assets or utilized for repaying short-term liabilities.

which can include. Value at Risk (VaR) model 5. liquidating bank borrowings which are primarily in the form of cash credit (and hence amenable for immediate liquidation). The basic models are: 1. STUDY OF ASSET LIABILITY MANAGEMENT IN INDIAN BANKS ALM MODELS Analytical models are very important for ALM analysis and scientific decision making. Scenario Analysis Model 4. using the prepayment options (if any embedded in the term loans). and raising short-term borrowings (e. and the call options. Stochastic Programming Model . if any embedded in bonds issued by the company. GAP Analysis Model 2. Duration GAP Analysis Model 3. Liability driven strategies focus on shortening the maturity profile of liabilities.g.: fixed deposits with a tenor of one year) to repay longterm borrowings.Asset driven strategies focus on lengthening the maturity profile of assets by the deployment of available lendable resources in long-term assets such as lease andhire purchase.

the Indian Banking system has not enforced the guidelines in total. but they rarely meet to take decisions. The Executive Director and other vital departments’ heads head ALCO in banks. Periodic review. Pricing assets and liabilities. The banks have formed ALCO as per the guidelines. There are minimum four members and maximum eight members. Public Sector banks are yet to collect 100% of ALM data because of lack of computerization in all branches.Any of these models is being used by banks through their Asset Liability Management Committee (ALCO). Discussing new products and Reporting. this research aims to find out the status of Asset Liability Management across all commercial banks in India with the help of multivariate technique of canonical correlation. Measuring risk. With this background. The discussion paper has following objectives to explore: • To study the Portfolio-Matching behavior of Indian Banks in terms of nature and strengths of relationship between Assets and Liability • To find out the component of Assets explaining variance in Liability and viceversa • To study the impact of ownership over Asset Liability management in Banks • To study impact of ALM on the profitability of different bank-groups . It is responsible for Responsible for Setting business policies and strategies. OBJECTIVES OF THE STUDY Though Basel Capital Accord and subsequent RBI guidelines have given a structure for ALM in banks.



Foreign Banks(36) . The groups were 1. The banks were grouped based on ownership structure.METHODOLOGY The study covers all scheduled commercial banks except the RRBs (Regional Rural Banks). SBI and Associates ( 8) 3. The period of the study was from 1992 – 2004. Nationalized Banks except SBI & Associates ( 19 ) 2. Private Banks( 30) 4.

This is necessary to deal with the problem of singularity – a situation that produces perfect correlation within sets and makes correlation between sets meaningless. . the assets were regrouped under six major heads and the liabilities were regrouped under four major heads as shown in table below.RECLASSIFICATION OF ASSETS & LIABILITIES The assets and liabilities of a Bank are divided into various sub heads. For the purpose of the study. The relevant data has been collected from the RBI website. This classification is guided by prior information on the liquidity-return profile of assets and the maturity-cost profile of liabilities. The reclassified assets and liabilities covered in the study exclude ‘other assets’ on the asset side and ‘other liabilities’ on the liabilities side.

Unfortunately. all of these correlations assess the same .CANONICAL CORRELATION ANALYSIS Multivariate statistical technique. we could merely compute the correlation between each set of assets and each set of liabilities. canonical correlation has been used to access the nature and strength of relationship between the assets and liabilities. To explore the relationship between assets and liabilities.

243 0.744 0. of course.464 0. The technique tries to compute the values of Ai and Bi such that the covariance between A & B is maximum. That is. reduces the power of each correlation and thus can obscure the findings. a Bonferroni adjustment needs to be applied.469 0.987 SBI & Associates 0. Canonical correlation provides a means to explore all of the correlations concurrently andthus obviates the need to incorporate a Bonferroni adjustment.268 0. Hence.716 0.that assets influence liabilities.314 -0.237 0.078 0. This Bonferroni adjustment. A and B (called canonicalvariates) are unknown.948 Pvt Banks 0. A = A1 * (Liquid Assets) + A2 * (SLR Securities)+ A3 * (Investments) + A4 * (Term Loans) + A5 * (Short Term Loans) + A6 * (Fixed Assets) B = B1 * (Net Worth) + B2* (Borrowings) + B3 *(Short Term Deposits) + B4 * (Long Term Deposits) To begin with. we should divide the level of significance by the number of correlations. It produces an output that shows the strength of relationship between two variates as well as individual variables accounting for variance in other set .188 0.046 -0.662 0. Foreign Banks R square Canonical Loadings Assets LA SLR INV TL STL 0.The essence of canonical correlation Measures the strength of relationship between two sets of variables (Assets (6) & Liabilities (4) in this case) by establishing linear combination of variables in one set and a linear combinations of variables in other set.461 -0.747 0.858 0.712 -0.328 -0.88 .997 Nationalised Banks 0.hypothesis . The technique reduces the relationship into a few significant relationships.568 -0.467 -0.998 0.

83 -0.945 -0.498 -0.007 0.903 -0. we can observe that there is a strong negative correlation betweenshort term deposit with both Term Loan and Fixed Asset.644 0. For example.948 -0. Since both are negative this means there is a strong correlation between FA and NW.885 0. it is the percent of variance linearly shared by an original variable with one of the canonical variates.201 -0.279 0. .476 0.593 0.457 0. Similarly for Foreign Banks.288 0.629 The first row (R2) is a measure of the significance of the correlation.FA Liabilities NW BOR STD LTD Redundancy Asset Liability -0. In this case all the correlations are significant.664 0.972 -0.212 0.523 0.728 -0. A negative loading indicates an inverse relationship. A loading greater that 40% is assumed to be significant.964 0.196 0.831 -0.255 -0.e. Fixed Assets (FA) under Assets has a loading of -0.903 and Net Worth (NW) under liabilities has a loading of -0.426 0.539 0.126 0. for Foreign Banks. The canonical loading is a measure of the strength of the association i.664.171 0.

the independent and dependent sets for different bank. given the other set of variable which gives an idea about independent and dependent sets. the canonical co-relation coefficients of different set of banks indicate that different banks have different degree of association among constituents of assets and liabilities.OBSERVATIONS As per the summary table above. This also gives an idea about the fact that whether the bank is asset managed or liability managed. Bank-Groups can be arranged in decreasing order of correlation: – SBI & Associates – Private Banks – Nationalized Banks – Foreign Banks Redundancy factors indicate how redundant one set of variables is. Looking at the redundancy factors.groups can be identified: .

• Strong negative correlation between short term deposit with both Term Loan and Fixed Asset. They can always borrow from active money market to manage their liability. Lately. these banks were actively managing assets and liability was dependent upon how well the assets are managed. This is in perfect consonance with the macro indicators. • Not used for long term assets or long term loans. . all other three have asset as their independent set. This indicates• Proper usage of short term deposit. Foreign Banks The canonical function coefficient or the canonical weight of different constituents in case of foreign banks Term Loans and Fixed Assets form asset side and Net Worth and Short Term Deposit from liability side have significant presence with following interpretation: • Very strong co-relation between Fixed Assetand Net Worth.Other than foreign bank groups. This means during the study period (1992-2004). The interest rates were coming down all these years and banks were busy in parking their assets in different avenues where they could get maximum return. banks especially the bigger one is not concerned about the liability. the scenario has changed in terms of interest rates. Now as there is ample liquidity in the market.

SLR Securities. As defined. However as the money market has become more matured. Term Loans. Short Term Loans. borrowings are near maturity liability while investment and term loans are of long term maturity. As defined above LA. . • Borrowings are used for Investment and Term Loans. so this strategy is to generate additional profitability at the cost of liquidity. Investments. This relationship can be interpreted in the following ways: • Very strong co-relation between FA and NW.Private Banks In case of private banks all constituents of asset side Liquid Assets. and Fixed Asset are significantly explaining the corelation while on liability side only Net Worth and Short Term Deposit are contributing. • Short Term Deposits is used for Liquid Assets. SLR and STL – all are highly liquid section of assets. This shows how actively these banks manage their asset to generate maximum return. So it is very prudent to employ short term deposit. So the private banks are using risky strategy of deploying short term fund in long term investment which is clearly against right asset-liability management. Under normal circumstances long term investment gives better returns. SLR and Short Term Loans. it is easy to manage liquidity without much of risk.

• There is negative co-relation between Borrowings and investment. SBI & Associates . The nationalized banks are more concerned about liquidity than profitability. The major interpretations are: • Very strong co-relation between FA and NW. short term loan. This is distinctly different from private banks strategy. However nationalized banks deploy long term liability in short term assets.Nationalized Banks In case of nationalized banks Investment. fixed asset contribute significantly in explaining asset part while net worth and borrowings constituent of liability is major factor. • Nationalized banks use Borrowings for Short Term Loans. • More concerned with liquidity than profitability • Conservative strategy ( in comparison toPrivate Banks) • Good short term maturity/liquidity management Nationalized banks use a borrowing (which is near term maturity) for short term a loan which is effective way of ALM.

• Most Conservative strategy • Over concerned with liquidity • Use Long term funds for Long as well as medium & short term loans Among all bank-groups. Investment and SLR’. But at the same time. So let us look into the profitability of these banks and relate that to their . short term deposits and long term deposits are significant while in assets side SLR investment. • Short Term Deposits and Short Term Liabilities are correlated. • Correlation between Long term Deposits and ‘Term Loans. private banks are more aggressive in managing their portfolio for better profit realization. borrowings. this group deploy long term fund for medium and short term loans.For SBI group all constituents of Liability namely Net worth. Term loans and fixed assets are significant. This can be called over concerned with liquidity and that too by paying a price in terms of less profitability by foregoing the opportunity to deploy them in long term assets. PROFITABILITY ANALYSIS OF BANKS As discussed above. SBI & Associates seem to be most prudent asset liability management as short term liability is matched with short term asset and long term assets is matched with long term liability. Following can be interpreted: • Very strong correlation between FA and NW • Strong correlation between Borrowings and STL. Investments.

deregulation and more autonomy given to the banks in terms of directed credit and regulated interest rates. Nationalized along with SBI are clubbed together as public banks while foreign and private banks are clubbed together as private banks. the public banks have caught up with private banks.ALM. Since 2002. The profit figures can be compared in terms of Net Profit Margin. The aggressive strategy adopted by them in terms of deploying asset for long term is being reflected in the better profitability as compared to public sector banks. Following graph depicts the comparison The above comparison shows that till 2002. This can be due to second generation banking reforms. For this all banks are divided into two groups. Return on Net Worth and Equity Multiplier.Public and Private. NET PROFIT MARGIN (%) 16 14 12 10 8 6 4 2 1995 1997 1999 2001 2002 2003 2004 1996 1998 2000 0 Public Private RETURN ON NET WORTH (%) . private banks were better in terms of profitability indicators.

10 15 20 25 30 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 0 Public Private 5 .

and holding costs get reduced. asset-liability management refers to the management of deposits. Reducing the gap between rate sensitive assets and rate sensitive liabilities. . Simulation models are relatively easier to consider in the context of networking and also computing powers. Reducing the maturity mismatch so as to avoid liquidity problems. storage. . In the Indian context. credit. . forex. and retrieval. forex reserves and capital. facilitates cross-bank initiatives in asset-liability management to reduce aggregate unit cost. which is accurate and reliable. In other words. the boundaries of asset-liability management architecture itself is changing because of substantial changes brought about by information technology. investments. It also helps in terms of quicker decision-making from the central office since branches are networked and accounts are considered as belonging to the bank rather than a branch. The open architecture.Information technology and asset-liability management in the Indian context:Many of the new private sector banks and some of the non-banking financial companies have gone in for complete computerization of their branch network and have also integrated their treasury. keeping in mind the capital adequacy norms laid down by the regulatory authorities. . The electronic fund transfer system as well as demat holding of securities also significantly alters mechanisms of implementing asset-liability management because trading. Estimating the main sources of funds like core deposits. borrowing. certificates of deposits. Managing funds with respect to crucial factors like size and duration. and to that extent the operations managers are provided with multiple possibilities which were not earlier available in the context of large numbers of branch networks and associated problems of information collection. which is evolving in the financial system. given a certain level of risk. This would prove as a reliable risk reduction mechanism. and call borrowings. The information technology initiatives of these institutions provide significant advantage to them in asset-liability management since it facilitates faster flow of information. transaction. and lending segments. Information technology can facilitate decisions on the following issues: .

the actual performance against the projections made and analyse the reasons for any effect on spreads. maturity.  Aim is to stabilise the short-term profits.  Examine the credit risk and contingency risk that may originate either due to rate fluctuations or otherwise and assess the quality of assets. quality and liquidity of assets and liabilities as a whole so as to attain a predetermined acceptabl risk/reward ratio.rate sensitivity.long-term earnings and long-term substance of the bank.  Examine the loan and investment portfolios in the light of the foreign exchange risk and liquidity risk that might arise. PURPOSE AND OBJECTIVES OF ASSET LIABILITY MANAGEMENT  Review the interest rate structure and compare the same to the interest/product pricing of both assets and liabilities.Product Innovation .  Review.Regulatory Framework .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 .REASONS FOR GROWING SIGNIFICANCE OF ALM -Volatility .Management Recognition An effective Asset Liability Management technique aims to manage the volume mix.

Net Interest Income. offers multifarious advantages to banks in areas like exposure management and capital management. But there is .Net InterestIncome/Average Total Assets Economic Equity RatioThe ratio of the shareholders funds to the total assets measures the shifts in the ratio of owned funds to total funds. Securitisation To Reduce ALM Gap In Banks By 23% : Securitisation. Banks can also use securitisation to generate profits from interest rate arbitrage and as an alternative funding source. as a financial management tool.Interest Income-Interest Expenses. The fact assesses the sustenance capacity of the bank. Net Interest Margin.

By replacing assets having a pre-determined cash flow schedule spread over time with cash. Such securities are called asset-backed securities (ABS). Besides. Typically. collateralised bond obligations (CBO) in the case of bond receivables and collateralised loan obligations (CLO) in the case of industrial loan receivables.another key benefit that banks can enjoy from securitisation: the management of their asset liability maturity (ALM) profile. It is a process through which illiquid assets are packaged. If the underlying assets are themselves of a very high credit quality or if a high credit rating on the ABS is not essential. the banking system’s maturing liabilities exceed its maturing assets by around 17 per cent. Crisil’s analysis reveals that on a three-year horizon. Reducing ALM Mismatches Since securitisation is a source of immediate liquidity. By nature. Introduction Securitisation refers to the conversion of cash flows into marketable securities. Securitisation can reduce this gap by as much as 23. securitisation offers a potent ALM management tool as banks can substitute assets having a finite maturity period with cash on their balance sheets. converted into tradable securities and sold to third-party investors. Collateralised debt obligations (CDO) are a hybrid of CLOs and CBOs as they refer to securitisations backed by a combination of bond and industrial loan receivables. the banking business is characterised by shorter-term liabilities funding relatively longer-term assets. the resulting instrument is referred to as mortgage-backed securities (MBS) in the case of housing loans.4 per cent. which engenders a mismatch in the players’ structural ALM profile. . the extent of credit enhancement may be minimal or non-existent. securitisation shortens the average maturity of assets. Although the stickiness and stability of the banks’ liability profile largely mitigates this risk. these instruments are highly rated and carry a variety of credit enhancement mechanisms. banks can effectively use it to manage balance sheets that have a higher average maturity of assets than liabilities. Managing structural liquidity is a key element of the banks’ risk management strategies and securitisation is a robust tool that enables them to effectively do just that. securitisation also allows banks to transfer some maturity-related risks like prepayment and conversion risks to third-party investors. Depending on the type of receivables securitised. thus improving the banks’ ALM profile.

3 per cent. car and employee loan receivables . which constitute around 80 per cent of the banks’ balance sheet size. Other nationalised banks 3. Hence. Housing. Estimation Of Benefits To Banks’ ALM Profile Crisil has analysed the ALM profile of the Indian banking system by segmenting banks into the following categories: 1. if we exclude foreign banks. that is. After securitising loans and advances worth Rs14. This means that liabilities maturing in three years exceed assets maturing in this period to that extent. Deposits. Foreign banks. Non-performing assets (NPA) 2. according to Report on Trend and Progress of Banking in India 2002-03 published by the Reserve Bank of India. they have a higher quantum of liabilities maturing in the zero-to-three-year bucket than assets. which get classified in the longest maturity bucket and hence. whereby an equivalent amount of loans and advances in the greater-than-three-year maturity bucket are substituted by cash. This is because foreign banks have a relatively more comfortable ALM profile than Indian banks on account of their higher networth levels. are largely sticky and have high renewal levels. and 5. On the other hand.5 per cent as compared to 5. let us consider a hypothetical scenario whereby a bank with a balance sheet size of Rs 100 has a negative ALM gap of 29 per cent in the zero-to-three-year maturity bucket. the banking system’s total assets amounted to Rs 16. CLOs and CDOs) 3. Older private sector banks On the whole. the negative ALM is reduced by nearly 50 per cent to 15 per cent. An analysis of the ALM profile of the various bank categories reveals that there is a negative gap of around 17 per cent of the total assets for a three-year time horizon. Investments in bonds and industrial loans (through CBOs. Securitisation can be one option to manage this gap. Credit card receivables 4. Crisil has identified the following asset classes from the banks’ overall asset composition as those that lend themselves to securitisation: 1.8 per cent for the overall banking system. thus substantially improving the bank’s ALM profile. the effective mismatch in the banks’ ALM profile would be considerably lower. provide comfort to the ALM profile. 2003.989 billion as at March 31. The segmental distribution of the ALM gap reveals that across bank categories there is a negative gap. The networth to total assets ratio for foreign banks is 11. New private sector banks 4. State Bank of India and its associate banks 2.For instance. the negative ALM gap increases to 19.

In estimating the quantum of benefits that the ALM profile can derive from this. Crisil has analysed the asset composition of the various bank categories. the banking system has a securitisation potential of over Rs 600 billion. in such a scenario. Further. Mitigation Of Prepayment And Conversion Risks Apart from enabling them to reduce their ALM gap.Further. the relative securitisation potential of these asset classes. If securitisation is structured in such a manner that the prepayment and conversion risks are completely passed on to third-party investors. there is the added pressure of the conversion of higher interest rate loans to lower interest rate ones. shortened the average maturity profile of their asset books. This is largely because of the higher securitisation potential envisaged for new private sector banks by Crisil. however. prepayments lower a bank’s interest income as it would need to deploy prepaid amounts at lower interest rates.4 per cent. securitisation also helps bank to manage the risks emanating on their balance sheet on account of prepayment and conversion of loans and advances. The Road Ahead For Banks . This was simulated by assuming that the securitised assets were replaced by cash on the banks’ balance sheets. they are mitigated for the concerned bank. In a declining interest rate scenario. this benefit is estimated at 23. Crisil compared the existing ALM gaps of the various bank categories with the estimated gap after securitisation. which has a similar effect as prepayments on the bank’s future income streams. For the banking system as a whole. The benefit on the ALM profile ranges from 9 per cent for old private sector banks and nationalised banks to 63 per cent for new private sector banks. According to Crisil’s estimate. in turn. Such securitisation transactions are yet to make a mark in India. The analysis reveals that the ALM gap falls for all categories of banks. the banks’ track record in originating securitisation transactions and the internal monitoring systems developed by them to track such transactions. This is essentially based on the relative asset composition of the various bank categories. It estimates that foreign and new private sector banks have the highest potential for securitisation at 10-12 per cent of their asset base as compared to an overall securitisation potential of 4 per cent for the banking system. and are mainly practiced in developed financial markets like the US and Europe. which.

This trend would essentially be driven by the growing awareness of securitisation in the Indian financial markets. however. Initially. Crisil believes that while the new private sector and foreign banks would initially take the lead in increasingly using securitisation as an alternative financial management technique. FOR RESPECTIVE TIME BUCKET .Thus. Crisil’s analysis clearly shows that the banking system stands to benefit from securitisation in terms of obtaining ALM benefits and mitigating prepayment and conversion risks. the thrust provided by the Securitisation and Reconstruction of Financial Assets and Enfor-cement of Security Interest Act and the other benefits provided by securitisation itself such as exposure management and managing the profit and loss account and balance sheet. other banks that have so far been conspicuous by their absence from the segment would also begin to look at it more favourably in terms of managing their ALM profile. 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. the management of capital structure is expected to be the key driver of securitisations.

2007 by Batool K. Asiri Abstract The Statistical Cost Accounting (SCA) method is used to test whether asset and liability of a bank could help forecast its profits. All Kuwaiti Listed Banks have been examined over the period 1980-1997 for the asset-liability relationship. Keywords: Statistical Cost Accounting. Gup and Brooks (1993) argued that "asset and liability management in banks is defined as the simultaneous planning of all asset and liability positions on the bank's balance sheet under consideration of the different bank . The study concluded that asset. mainly loans. June. the sample was divided into sub-samples.Assets-liabilities management in banks—a case of Kuwait Indian Journal of Economics and Business. Considering the size difference. In managing asset-liability. It also proved that a bank's profits are positively related to risk. Kuwait I. size effect. are the key variable in generating profits whereas liabilities ate reducing profit. INTRODUCTION The Statistical Cost Accounting (SCA) method is used to test whether assets and liabilities of a bank can in fact help forecast its profits. Asset-liability management. the results highlight a significant difference between small and large banks and between before and after the Gulf war.

would obviously make the bank more valuable to its shareholders. which increase the profitability of the bank without increasing its risk." Due to the competition in the financial markets. Since the balance sheet is composed of assets and liabilities. generally. all decisions made by management have an effect on risk and returns. The most common ratios that measure the level of risk in the banking industry ate categorized into: Credit risk. should be studied and evaluated to be able to acceptably predict its future performance. Similarly. providing liquidity and enhancing the value of the bank. This means that a bank is expected to take risk and transform it to services. banks seek out greater efficiency in the management of their assets and liabilities. which is maximizing its wealth for shareholders. Therefore. in the form of its financial objectives and legal. alternative choices of investment. managerial and market constraints. liquidity and interest rate changes in the market. Fraser and Fraser (1991) argued that the financial performance of commercial banking is better if its profit is high and its risk is low. this means that we are talking about rate of return on assets and cost of borrowing on liabilities.e. But since. . a complete picture of the bank. decisions which reduce the risk of the bank without reducing its profitability will also increase the value of the shareholder wealth. i. Therefore. A bank's assets and liabilities will affect its valuation in the market. credit and capital risk that mostly derive profits (these are explained in the next section). liquidity. liabilities. Profits generated by listed banks always give positive signals to the stock market. The aim of this study is to develop models for assets-liability management as a risk-return management of the banking industry in Kuwait. the risk and return concept is also significant at this stage because banks are tested to see whether they are a "risk machine" or not. the operating profit will be examined to see how it is determined together with determining what factors from the balance sheet create the profits of the bank and what factors deteriorate it. products and then profits. what should be the composition of a bank's assets and liablities in order to maximize the bank's profit? What should be the optimal combination of ALM? These are the two questions raised by Kosmidou et al (2004) who argued that the optimal balance between these factors cannot be found without considering important interactions that exist between the structure of a bank's liability and capital and the compositions of its assets. The risk-return relationship in the banking industry will affect its valuation in the market. In another words. investors are assumed to be risk averse. and capital which are considered important components in determining profits. The study investigates risk factors such as liquidity. management should have a good trade-off between risk and return. and hence help to achieve the main goal of a bank. Fraser and Fraser (1991) argued that decisions. The main source of profits generated by a bank is the balance sheet portfolio: the assets. globalization. Therefore. Management should always ask questions about the level of returns generated compared to the level of risk taken. its balance sheet. its ability to acquire other banks or to be acquired at a good price. government regulation. The core issue of Asset-Liablity Management (ALM) is the bank's balance sheet and the main question is: Given a certain level of risk. Therefore. competitors. Banks differ in their sizes and this will have an effect on responsibilities of management. high profit to them means accepting high risk. for the purpose of mitigating interest rate risk. debt level and profitability. Accurately evaluating and measuring the performance of commercial banks is not an easy task.

the debt settlement problem has increased the banks' risk aversion to large lending operations and hence might have deprived them from profitable opportunities. it measures the risk of interest or principal on loans that will not be paid. In this study we use total loans rather than medium loans since it is difficult to categorize the size of loans. which is almost entirely owned by the private sector. Fraser and Fraser (1991) suggested "Medium Loan / Total Assets". our ratio is defined as: "Credit Risk = Loans / Total Assets". . withdrawals of demand deposits and opportunities for investments in securities. the banks were left with large portfolios of non-performing loans. The ratio is measured as: "Liquidity Risk = Liquid assets / Deposits". Credit Risk: Credit risk can be calculated by the ratio of "loans to total assets".Capital risk and Liquidity risk. Under this scheme. In other words. The situation of the banking sector has worsened following the invasion of Kuwait by the Iraqi regime in 1990. Capital Risk: This type of risk can be calculated with the ratio of "equity to total assets" and explains how much a bank's asset values may decline before the position of its depositors and other creditors is jeopardized. CHARACTERISTICS OF BANKING INDUSTRY IN KUWAIT Kuwait is a member of the World Bank's International Bank for Reconstruction and Development (IBRD). As a result of speculative bubbles in the history of Kuwait and the crash of the unofficial "Souk Al-Manakh" stock market. This demand could be demand for loans. non-performing loans were swapped for government debt bonds for maturities ranging from ten to twenty years. Again reducing credit risk means giving less loans and therefore the bank suffers from the lower return. The joint ownership of banks and the reputation of the government as a rescuer of the last resort. the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency. the government is one of the shareholders in the rest of the banks. may have contributed to bank's misbehavior. profitability of banks might have been affected by the fact that government debt bonds could not be traded or discounted. Generally it is expected that the higher the ratio. As a result. The reason for a decline in the profit is that banks forfeit investing into long-term securities and giving loans. Failure to provide adequate liquidity to meet the demands of depositors of creditors can cause a shut down of a bank within a short period. A brief explanation for each level of risk is given below. This ratio is defined as: "Capital Risk = Equity / Total Assets" II. High ratio of capital to assets means lower degree of risk. Except for National Bank of Kuwait (NBK). Liquidity Risk: Liquid assets are used to measure the size of available cash and near cash assets to meet the withdrawal demand. Another most important feature of Kuwaiti banks is the mixed nature of their ownership. In addition. The government has since intervened to rescue the financial system through the "Difficult Debt Settlement Program". Therefore. the lower the risk of liquidity and the lower the opportunity for profit.

due to this notion. Komidou et al. the country's banking industry is fundamentally sound and commercial banks are regulated and supervised by the Central Bank. The Statistical Cost Accounting (SCA) method has been used to test these hypotheses. Data for 1990 is not available. Hester and Pierce. The Industrial Bank of Kuwait offers financing for industrial and agriculture-related projects. This result was consistent for local and foreign banks. in terms of assets and deposits. the second hypothesis tries to measures the relationship between risk and return. (2004) concluded that assets are positively and liabilities are negatively related to profits. It is generally hypothesized in finance that the higher the level of risk the higher the expected return. 1964. The reason for this time period is to have a reasonable data covering the period before and after the Iraq invasion and also because longer time periods might not give a clear picture. Indian. so it is excluded from the study. Year 1991. The list of the banks is given in Table 1. Greek and Italian banks (Hester. The Kuwait Real Estate Bank offers financing of residential and commercial property developments. The two specialized government-owned banks provide medium and long-term financing. SCA method assumes that the rate of return on earning assets is positive and varies across assets. The National Bank of Kuwait (NBK) is more than twice the size of the next largest. In our study. this method was tested in American. Our study is a partial replication of the work done by Kosmidou et al. 1982. the banking sector in Kuwait is mainly composed of eight conventional banks (six commercial and two specialized banks) and an Islamic bank. These two banks have had the best records in terms of profitability and financial positions. The structure of the banking sector is fairly concentrated. In addition to the central bank. liquidity risk or capital risk?) The third hypothesis is to test whether there are any differences among the size of banks in their asset-liability management. is sometimes dropped from some analyses because data in this year is extraordinary for most of the banks. 1975. The emphasis here is on measuring which type of risk generates higher returns (i. the National Assembly allowed foreign banks to establish operations in Kuwait. With an amendment to the Banking Law of 1968. which covers the period after the invasion. III. which is the first year after the invasion. Calcagnini and Hester. all eight banks listed in the Kuwait Stock Market were examined over a period of 18 years from 1980 to 1997. With . The time series is divided in two periods: 1980 to 1989 the ten years before the invasion (Gulf War) and 1991 to 1997. Vasiliou. According to Kosmidou et al (2004). 1996. the Gulf Bank (GB). is it credit risk. whereas the rate of cost on liabilities is negative and varies across liabilities.e. The National Bank of Kuwait is the largest bank and one that also maintains an international network. Hester and Zoellner. Kwast and Rose. (2004) where they studied 36 domestic and 44 foreign banks operating in the UK over the period 1996-2002 to examine the asset-liability relationship. 1997). National Bank of Kuwait and Gulf Bank own around 50% of the assets of conventional banks and dispense around the same proportion of total banking credit. 1966. METHODOLOGY AND DATA Three hypotheses are tested in this study.Overall. The first hypothesis is measuring the relationship between operating profit and asset-liability components. Figure 1 shows the comparison between the sizes of these banks.

n l denotes the number of banks.i] is the ith asset. l = 1.b1i][A.sub. The listing of banks in Table 1 is based on the size of total assets. Since all variables are divided by total assets. i.jt] is a stochastic term To eliminate the size bias.sub.i]) and model (2) is developed. .sub.. [a. These risk measures are: liquidity. approximately 17 observations per bank.e. 2. dependent and independent variables are converted to ratios. k t is the time period. the total number of observations for the study ended up to 122.sub. i. and credit risk which are defined in Table 2. T b1i denotes the marginal rates of return and indicates the changes in the bank's profit by replacing one unit of cash with one unit of the ith asset and is expected to be positive.j] is the jth liabilities.sub. capital. This is clearly shown in Figure 1. [FIGURE 1 OMITTED] The Statistical Cost Accounting method applied in this study relates differences in profitability to differences in assets and liabilities.sub.e. These specialized banks are the smallest in terms of their assets compared to the commercial banks.sub..jlt] [e.0] is a constant term [e. . t = 1. the new ratios are computed from the liability figures and included in the model to measure the level of risk...these adjustments to the data. In model (2).b2j][L.sub. 2.sub. all variables of model (1) are divided by the bank's total assets ([] = [a.sub.jt] (1) Where P denotes the operating profit of a bank [A. b2j denotes the marginal costs of liabilities and indicates the changes in the bank's profit by adding one unit of cash and one unit of jth liability and is expected to be negative..sub. . 2.. Thus. Fraser and Fraser (1991) argued that ROA and ROE are the best measures of . the Industrial Bank of Kuwait and Kuwait Real Estate are specialized banks. m [L. 2.sub. The first six banks in Table I are the commercial banks while the other two. the model for a bank in year t used in this study is described as follows: [P. Data has been collected from the Financial Operating Report published by the research unit of the Institute of Banking Studies in Kuwait together with the financial reports for each bank.ilt] [[summation].. .. the dependent variable is changed to ROA and the liability figures changed to risk ratios. j = 1. i= 1.0] [[summation].

profitability. Murphy et al. (1996) argued that in cross-sectional studies, the use of ROA is a more conservative measure of performance than ROE. [] / [] = [a.sub.0] / [] [summation] ([sub.b1i][A.sub.ilt]) / [] [summation] ([sub.b2j][L.sub.jlt]) / [] [sub.b3q][R.sub.qlt] [] (2) Where [] is [] / [] is a stochastic term [A.sub.i] is the ith asset, i = 1, 2, ... m [L.sub.j] is the jth liabilities, j = 1, 2, ... n l denotes the number of banks, l = 1,2 ... k t is the time period, t = 1, 2, ... T [R.sub.qlt] is different types of risks, (liquidity, capital, credit) b1i denotes the marginal rates of return and indicates the changes in the bank's profit by replacing one unit of cash with one unit of the ith asset and is expected to be positive. b2j denotes the marginal costs of liabilities and indicates the changes in the bank's profit by adding one unit of cash and one unit of jth liability and is expected to be negative. [a.sub.0] is a constant term [e.sub.jt] is a stochastic term

The difference between model (1) and model (2) is that the first model deals with absolute figures in Kuwaiti Dinars while the second one deals with ratios. Stepwise regression is used for both models to test the null hypothesis that there is no relationship between profits generated by a bank and its assets or liabilities. T-test is used for all models at a significant level of 1%. Durban-Watson (DW) statistic is also used to test for autocorrelation. Finally, residual analysis is also conducted to test for heteroscedasticity in the variables. The variables used in these two models are listed in Table 2. To test for the size differences, the sample has been divided to include two sub-samples: small and large banks and two models are developed for each size. Additionally, the sample has been split into two groups, according to their performance measured by their ROA. The first group includes the most profitable banks and the second, the less profitable ones. The cut-off point for the split is based on the annual industry's average ROA. ROA with more than the industry in the same year is considered as large profit firms and less than the industry is the small profit firms. This is consistent with the study done by Kosmidou et al. (2004). To separate between the two groups in one model, dummy variables are also used for the size. Additionally, a dummy variable (I) is used to see whether there is any difference between profit generation through assets-liabilities management before and after the invasion.

IV. EMPIRICAL RESULTS All variables explained in model (1) were included in the stepwise regression and the statistical significant variables in terms of t-values are summarized in table 3. All variables, including the two dummy variables for the size and invasion are statistically significant at 1% level. All assets have shown a positive relation in generating the profit for the year with the exception of "Fixed and other Assets" which is found to be negative. The reason could be that this variable which is mainly land, building and investment in different small types of assets, is not only incapable of generating profit but also reduces the opportunity for investment in profitable investments. The more money is invested in this kind of assets, the lesser the opportunity for giving loans and investment on longer term assets. On the other hand, the tvalue for proposed dividend provides statistical significant results indicating that the more the dividend, the higher the operating profit generated by the bank. It could be that investors are short-sighted and attracted to banks which provide higher dividends. In other words, dividends might be a positive signal in the market attracting funds from depositors and clients for taking loans. Looking at the dummy variables in explaining the profit, the size dummy variable shows that there is a significant difference between small and large profit banks, (t-value = 4.096). Similarly, the dummy variable for the invasion shows a significant difference between the Table 4 summarizes the regression statistics for model (2) including all measures of risk with ROA as the dependent variable. The results are consistent with model (1) with some additional explanation. Individual liability variables are changed to different types of risks: Liquidity risk, Capital risk and Credit risk. All these risk measures show statistical significant t-values at 1% level of significance, indicating the positive relationship between risk and return. The result is significant for the shareholders because they are interested to see the status of the bank and to measure whether the bank is able to provide a reasonable ROA. Creditors and depositors are also interested in these performances to observe the ability of these banks for repaying debts and meeting the withdrawal requirements. The results achieved could help management to be prepared for avoiding the bank failure. two periods, before and after the invasion (t-value = 3.080). Table 4 summarizes the regression statistics for model (2) including all measures of risk with ROA as the dependent variable. The results are consistent with model (1) with some additional explanation. Individual liability variables are changed to different types of risks: Liquidity risk, Capital risk and Credit risk. All these risk measures show statistical significant t-values at 1% level of significance, indicating the positive relationship between risk and return. The result is significant for the shareholders because they are interested to see the status of the bank and to measure whether the bank is able to provide a reasonable ROA. Creditors and depositors are also interested in these performances to observe the ability of these banks for repaying debts and meeting the withdrawal requirements. The results achieved could help management to be prepared for avoiding the bank failure. Considering the size factors, two models are developed for generally high-profit banks compared with low-profit banks, once for model (1) and next for model (2) as reported and summarized in Tables 5 (a) and 5 (b). These tables clearly show that there is a significant

difference between assets-liabilities management among high and low-profit banks'. Highprofit banks generally generate profits positively with assets and negatively with liabilities. The [R.sup.2] is very high 0.95 indicating that 95% of the variation in the profit is explained correctly by the assets and liabilities. Low-profit banks produced unusual models with negative relation between loans and profits. This could be the case in Kuwait where they could charge low interest for loans. Alternatively, it could be that the sample is small and other variables are missing in the model since [R.sup.2] is very low (0.27). Table 5 (b) shows that liquidity and capital risk are the two significant key points for determining profits for small profit banks, both variables having significantly high t-values at 1%. Additionally, deposits and investments also contribute positively to the profits generated by the bank. Categorizing the banks as small and large in terms of their assets, or as commercial and specialized their portfolios of assets-liabilities also differ. Two models are developed for each size/type and the summary for the regression model is reported in Table 6. In all the two subsamples the relationship between risk and return is shown to be positive. But the level of risk varies according to size of the bank. Liquidity risk, credit risk, capital risk are all highly significant for small and specialized banks, while only liquidity risk is significant for large banks. Additionally, "Deposits and investment in banks" has very significant effect on return on assets for large firms. Government bonds are found to be either insignificant or negatively related to profit for small-profit banks. This strange relationship is because the government has swapped the unfunctioning loans into bonds--as a result, profitability has been negatively affected because debt bonds could not be traded or discounted. In addition, the debt settlement problem has increased the banks' risk aversion to large lending operations and hence might have deprived them from profitable opportunities. Kosmidou et al. (2004) investigated the performance of large and small banks in the UK, they concluded that small banks exhibit higher overall performance compared to large ones. The finding was also similar to the study done by Vasilion (1996) for Greek banks where it was found that annual rates of return on fixed assets are higher for the high-operating profit group. The results for Kuwaiti banks do not provide evidence that small banks generate greater profit, but interestingly it showed that the behavior of assets-liabilities management differ for small compared to large firms in generating profits. Low profit firms have more emphasis on capital risk, liquidity risk, and deposits and investments. On the other hand, large profit banks have more emphasis on taking credit and capital risk and reducing fixed assets in order to generate profit. This final finding contradicts the results reported by Kosmidou et al (2004) where they found a positive relation between fixed assets and profits. Looking at the effect of the Iraq Invasion, Table 7 reports the summary results. Before the invasion, three variables were found to be highly significant at the 0.001% level. Dividends and total deposits both have a positive effect in generating profits while loans were found to be negatively affecting profits. This result is also consistent with the small-profit bank which was reported in Table 6. The result after the Invasion looks the opposite. Loans are positively related to the profit with t-value (8.488) and significant at 0.001% while "Fixed and Other Assets" is negatively related--which is consistent with model (1).


information from the stock market could be added to the model to see the effect of the market on the profit. Moreover. The results provide evidence that generally assets. banks were left with large non-performing loans. This will enable them to identify their competitive advantages and disadvantage and to change their policies towards asset and liability management. negatively contribute to the profit. mainly deposits. Finally. APPENDIX I Definition of the terms according to the Institute of Banking Studies-Kuwait Terms Definitions . The strange results of the two different periods of the study before and after the invasion describe the unusual case of Kuwait. Except for NBK. may have contributed to the bank's propensity for imprudent behavior. positively contribute to the profit but liabilities. mainly loans. while the Fixed and Other Assets where found to be negatively related to profit. Furthermore. The significance of individual assets differs: loans ate highly significant and followed by deposits and investments. In general. a statistical cost accounting analysis could be of particular interest to bank management. Another salient feature of Kuwaiti banks is the mixed nature of their ownership. as the managers can employ this analysis to identify the relative position of their banks in relation to their main competitors. a comparison study could be made between commercial and Islamic banks.In this study all commercial and specialized banks listed in Kuwait are examined in order to develop models for asset-liability managements in relation to profit generation. The joint ownership of banks and the reputation gained by the government as "a bailer of last resort". a number of additional ratios could be added to the models developed in order to get a better explanation of the profit. The results of this paper may help banks to determine the factors which might create more profit and differentiate high and low-profit banks. Finally. this paper examines if there are any differences in banks operating on a small scale of large scale. which is almost entirely owned by the private sector. the government is a shareholder in the rest of the banks. These loans were swapped to government bonds for long term maturities by the government of Kuwait. Due to the Stock Market crash in 1980s and the invasion of Kuwait in 1990.

Amounts owned by the bank to others. debt purchase bonds affiliates. and other liabilities. are included in the fixed assets. and equipment All types of loans. other short term deposits. All types of investments in shares. Other assets include all unspecified assets. and other assets that can be quickly converted into cash.Assets by the classified as Assets are economic resources owned bank. The assets are further liquid assets. Investments excluding bonds. overdrafts provided to others by the Cash in hand and readily available balances such as demand deposits or . The total liabilities consist of deposit liabilities. Loans and advances discounts and bank. treasury bills. investments. furniture. debts/loans/borrowings. Fixed and other assets land. fixed assets. Liabilities other represent major sources of funds used by the bank. investments in subsidiaries and and other investments which are not considered as of short term nature. They also All tangible long term assets like buildings. than the shareholders. advances. Liquid Assets bank current account balance. etc. loans.

"Combining Goal Programming Model With Simulation Analysis For Bank Asset Liability Management Information". Aug Vol. "Linking Profits to Asset-liability Management of Domestic and Foreign Banks in the UK". (2004).. other organizations and other agencies and certificates of deposits. and any undistributed or unallocated profits retained in the business (Reserves and retained earnings). C. and all types of statutory/legal/special/general reserves created out of the profits of the bank. (2004). banks. . business firms. INFOR. It also includes REFERENCES Kosmidou K. Vol. All paid up share capital including capital raised by right-issues and Any liability not classified as borrowings. No. 3. and Pasiouras F. Floropoulos J. Other liabilities deposits or provisions. 42. --and Zopounidis. Total equity share bonus share issues (share capital). Applied Financial Economics. 1319-1324.. 14.Deposit liabilities bank from other Consist of deposits obtained by the individual customers.

Burr Ridge. Vol. M. BATOOL K. Profits and Policy". and Hester. Gunther. J. (1989). 6. Bombay University Press. 233-54. Operating. ASIRI Department of Economics and Finance University of Bahrain. "Indian Banks: Their Portfolios. Kwast. 67-73. XLVIII. January. D. Efficiency. "The Relation between Bank Portfolios and Earnings: An Economertirc Anlaysis". D. J. Vol. Hester. "Bank Management and Portfolio Behaviour". 43. Yale University. D.Calcagnini. "Interest Rate Risk Management". L. 3. Bombay India. (1982). (1966). Press. CT." Rivista di Politica Economica. --(1964). F. Journal of Banking and Finance. 4. A Guide to Firm Analysis".. R. "Linking Profits to Greek Bank Production Management". L. G. J. 372-86. T. (1997). 3-43. (1991). D. D. (1993). Vasiliou. Fraser. (1975). L and Rose. Bahrain Table 1 Listed banks in the Kuwait Stock Market Total Assets (in million KD) No. "Cambiamento Istituzionale e Redditivita Delle Banche in Italia. D. 2. "Pricing. and Brooks. 5. 6. --and Zoellner. M. Irwin Professional Publishing. and Profitability among Large Commercial Banks". E. Federal Reserve Bank of Dallas.. Review of Economics and Statistics. (1996). Probus Professional Publication. "Evaluating Commercial Banks Performance. International Journal of Production Economics. 1. and Fraser. "Texas Banking conditions: Managerial Versus Economic Conditions". J. and Pierce. Name The National Bank of Kuwait (NBK) The Gulf Bank (GBK) Al-Ahli Bank of Kuwait (ABK) Commercial Bank of Kuwait (CBK) The Burgan Bank (BB) Bank of Kuwait and the Middle Established 1952 1960 1967 1960 1976 1971 1980 1374 1168 1021 1006 409 550 1997 4118 1739 1255 1288 1145 919 . Gup. W. R. B. New Haven. October.

571 -0.906 t-value -3.054 0.216 df = 122 Sig-level 0.030 -0. East (BKME) Kuwait Real Estate Bank (KREB) The Industrial Bank of Kuwait (IBK) 1973 1973 310 434 554 383 Table 2 Independent variables Variable A1 A2 A3 A4 A5 L1 L2 L3 CapR LigR CrdR LM D1 D2 Description (2) Liquid assets: Cash short term deposit treasury bills guaranteed funds deposit certificate Deposits in banks and Investments in quoted and unquoted securities Loans and borrowings Government Bonds Fixed assets and other assets Total deposits Other liabilities Proposed dividends Capital Risk = Equity / Total Assets Liquidity Risk = Liquid (Short-term) assets / Deposits Credit Risk = Loans / Total Assets Leverage Multiplier = Total Assets / Equity Dummy variable: 0 = low and 1 = high profit Dummy variable: 0 = before invasion and 1 = after invasion Table 3 Regression results for Model (1).999 DW = 1.420 4.547 0.010 2.445 -3.sup.101 0.007 0.2] = 0.130 4.008 0. Dependent Variable: Operating income Variables (Constant) Liquid Assets Dividends Fixed and Other Assets Deposits & Investment Total Deposits Loans and Discount D1: Size: 0 = small.002 0.000 0.096 3.7.625 Variables (Constant) Liquid Assets Dividends Fixed and Other Assets Deposits & Investment Total Deposits Loans and Discount D1: Size: 0 = small.011 0.843 5.083 F-sig = 0.043 8.003 . 1 = large D2: Invasion: 0 = before.364 4.004 4.000 0.744 0.000 0.128 0.033 0.2] = 0.000 0. 1 = large D2: Invasion: 0 = before. 8. 1 = after Adj [R. 1 = after Adj [R.625 Coefficients -10.625 -4.725 12.sup.000 0.001 Standard error 2.099 3.000 0.030 0.000 0.

028 0.sup.012 0.273 Models (1) High Profit Banks Variables (Constant) Liquid Assets Loans and Discount Fixed and Other Assets Total deposits Dividends Adj [R.sup.844 2.052 0.262 -2.020 Standard error 8.sup.817 0.024 0.055 2.009 0.017 0.272 Sig-level 0.031 Standard error 0.026 0.320 0.103 0.031 -0.008 0.228 2.2] = 0.007 0.020 0.sup. Dependent Variable: ROA Variables (Constant) Liquidity Risk Capital Risk Credit Risk Deposit & Investment/Total Assets Proposed Dividends Fixed & Other Assets/Total Assets Adj [R.538 0.002 Table 5 (a) Regression results for Model (1).002 1.000 0.011 0.004 0.2] = 0.344 Variables (Constant) Liquidity Risk Capital Risk Credit Risk Deposit & Investment/Total Assets Proposed Dividends Fixed & Other Assets/Total Assets Adj [R.776 -2.049 0.005 DW = 1.008 0.025 1.011 0.332 0.012 0.116 -0.036 -0.344 Coefficients -2.2] = 0.000 0.2] = 0. High v.021 0.185 df = 123 Sig-level 0.005 0.052 -0.112 df = 53 3.153 0.231 4.712 4.952 (2) Low Profit Banks (Constant) Loans and Discount Government Bonds Shareholder's equity Adi [R.011 0.952 Coefficients -8.051 0.000 0.2] = 0.051 0.697 4.017 -2.927 t-value -5.sup. Low-profit banks Dependent Variable: Operating profit Models (1) High Profit Banks Variables (Constant) Liquid Assets Loans and Discount Fixed and Other Assets Total deposits Dividends Adj [R.Table 4 Regression Results for Model (2).000 0.980 3.054 df = 68 t-value -0.021 3.008 0.340 .024 -0.375 0.

029 0.000 0.029 Standard error 0.732 4.026 0.2] = 0. High v.086 0.019 0.027 0.610 0.671 0.000 0.149 4.086 df = 53 -1.009 0.026 Coefficients -1.007 Standard error 0.2] = 0.041 0.sup.sup.000 0.760 -3.976 3.496 (2) Low Profit Banks (Constant) CapitalRisk Liquidity Risk Deposits & Investment/ Total assets Dividends Adj [R.000 0.000 0.713 0.2] = 0.055 0.273 Table 6 Regression results for Model (2).073 -0.496 (2) Low Profit Banks (Constant) CapitalRisk Liquidity Risk Deposits & Investment/ Total assets Dividends Adj [R.031 0.2] = 0.312 2.424 0.219 -1.002 0. Commercial (Large) v.021 0.038 .057 0. Specialized banks (Small) Dependent Variable: ROA Models (1) Commercial banks (Large Total Assets) Variables (Constant) Liquidity Risk Deposit & Inv/Total Assets Coefficients -1.257 Sig-level 0.494 0. Low-profit Banks Dependent Variable: ROA Models (1) High Profit Banks Variables (Constant) Fixed & Other Assets/ Total Assets CreditRisk CapitalRisk Adj [R.273 Models (1) High Profit Banks Variables (Constant) Fixed & Other Assets/ Total Assets CreditRisk CapitalRisk Adj [R.582 0.016 df = 68 t-value -1.009 -3.292 0.sup.009 0.sup.sup.008 0.2] = 0.009 Table 5 (b) Regression results for Model (2).273 2.877 2.005 0.083 0.289 2.375 3.031 0.016 0.947 -2.(2) Low Profit Banks (Constant) Loans and Discount Government Bonds Shareholder's equity Adi [R.

000 0.380 3.2] = 0.511 8.2] = 0.900 5.012 -0.253 0.000 0.016 df = 77 6.824 0.391 df = 32 t-value -3.207 (2) Specialized banks (Small Total Assets) (Constant) Liquidity Risk Credit Risk Capital Risk Dividends Adj [R.096 Standard error 0.2] = 0.2] = 0.075 0.637 Models (1) Commercial banks (Large Total Assets) Variables (Constant) Liquidity Risk Deposit & Inv/Total Assets Dividends Adj [R.000 Coefficients 1.sup.014 0.425 8.000 0.002 0.001 0.sup.000 Table 7 Regression results for Model (1).009 0.375 2.614 Models (1) Before invasion Variables (Constant) Dividends Total deposits Loans and Discount Adj [R.000 0.442 df = 44 t-value 2.003 .000 0.637 0.060 0.162 0.010 0.001 0.710 2.002 0.000 4.620 0. Before and After the Invasion Dependent Variable: Operating profit Models (1) Before invasion Variables (Constant) Dividends Total deposits Loans and Discount Adj [R.516 0.660 0.sup.297 1.sup.022 0.661 Sig-level 0.329 3.035 0.sup.908 (2) After invasion (Constant) Loans and Discount Fixed and Other Assets Adj [R.002 0.636 3.Dividends Adj [R.014 0.127 -5.908 (2) After invasion (Constant) Loans and Discount Fixed and Other Assets 1.145 Sig-level 0.2] = 0.001 0.000 0.sup.sup.2] = 0.118 0.032 0.488 -4.073 -0.078 0.010 0.029 df = 89 -3.207 (2) Specialized banks (Small Total Assets) (Constant) Liquidity Risk Credit Risk Capital Risk Dividends Adj [R.003 4.2] = 0.464 7.520 3.700 0.

NIM = Net Interest Income/Average Earning Assets = NII/AEA Since NIl equals interest income minus interest expenses. . than ever before because of the removal of restrictions. . Several banks have inadequate and inefficient management systems that have to be altered so as to ensure that the banks are sufficiently liquid. As the basic objective of banks is to maximize income while reducing their exposure to risk. . As the focus on net interest margin has increased over the years.614 COPYRIGHT 2007 Indian Journal of Economics and Business CONCLUSIONS Emerging issues in the Indian context With the onset of liberalization. An increasing proportion of investments by banks is being recorded on a marked-tomarket basis and as such large portion of the investment portfolio is exposed to market risks. Countering the adverse impact of these changes is possible only through efficient assetliability management techniques. efficient management of net interest margin becomes essential. there is an increasing possibility that the risk arising out of exposure to interest rate . In the context of a bank. The following points bring out the reasons as to why asset-liability management is necessary in the Indian context: . Indian banks are now more exposed to uncertainty and to global competition.sup. Indian banks are now more exposed to the vagaries of the international markets. especially with respect to forex transactions. asset-liability management refers to the process of managing the net interest margin (NIM) within a given level of risk. This makes it imperative to have proper asset-liability management systems in place.Adj [R. Asset-liability management becomes essential as it enables the bank to maintain its exposure to foreign currency fluctuations given the level of risk it can handle. .2] = 0. Sinkey (1992) suggests that NIM can be viewed as the spread on earning assets and uses the term spread management.

This is because of the fact that the institutional arrangements are mainly due to historical reasons of convenience and a perceived static picture of the operating world. in the Indian context. the strategy for asset-liability management becomes more challenging because one has to adopt a modular approach in terms of meeting asset liability management requirements of different divisions and product lines. the challenge could arise from say the merger of SBI. IDBI. It also enhances the capability of institutions to significantly alter their risk profiles at short notice because of the flexibility afforded by the characteristics of products of different divisions. In other words. asset liability management is narrowly focussed and many a time not in a position to achieve the desired objectives. Such a scenario need not be considered extremely hypothetical because combined and stronger balance sheets provide much greater access to global funds. it maybe appropriate to think in terms of reorienting our institutional structures (removing the distinctions between commercial banks. as well as other activities like mutual funds. This also requires significant managerial competence in order to have a conglomerate view of such organizations and prepare it for the challenges of the coming decade. The integration of different financial markets. In such a situation. SUGGESTIONS It is important to note that the conglomerate approach to financial institutions. Hence. which is increasingly becoming popular in the developed markets. could also get replicated in Indian situations. instruments and institutions provide greater opportunities for emerging markets like India to aim for higher return in the context of minimizing risk. It is also possible that the same institution involves itself in short-term and long-term lending-borrowing activities.volatility will be built into the capital adequacy norms specified by the regulatory authorities. This. insurance and pension funds. As long as the artificial barriers between different financial institutions exist. non-banking financial companies. and . This implies that the distinction between commercial banks and term lending institutions could become blurred. and LIC. in turn will require efficient asset-liability management practices. But it also provides opportunities for diversification across activities that could facilitate risk management on an enhanced footing.

(1995). & Konishi. Indian legal hierarchy. The World Bank (1995). R (1995). solvency. R (1995). rather than narrowly focussed asset-liability management techniques for individual banks REFERENCES Fabozzi. Debt market in India: Constraints and prospects. The emerging Asian bond market: India. This will go a long way in ironing out the mismatches between the assets and the liabilities. (1997). Saunders. Vaidyanathan. New Delhi: S Chand & Co. Financial institutions management (2nd ed). Prepared by ISec Mumbai. (1987). Debt market in India: Constraints and prospects. (1998). Bank Asset and Liability Management: Strategy. J.F. Analysis . Commercial bank financial management(4th ed). Sinkey. Mumbai: Sudhir Shah Associates (website). R.. etc. 67(4). Relevance and importance of asset-liability management in banks. (1996). Indian Institute of Management-Bangalore. Harrington. Shah. Bangalore: Center for Capital Markets Education and Research. 67(4). Jain.Moorad Choudhry . liquidity. Trading.L. New York: Maxwell Macmillan International Edition. Strategic planning for asset liability management. The Journal of the Indian Institute of Bankers. Asset and liability management by banks. Asset-liability management. A. Paris: OECD. marketability. Kannan. The Journal of the Indian Institute of Bankers. (1992). S. FJ. Chicago: Irwin. A. K (1996). J. Vaidyanathan. Bangalore: Center for Capital Markets Education and Research.term lending institutions to start with) and having a conglomerate regulatory framework for monitoring capital adequacy. Indian Institute of Management-Bangalore. www.Sheshunoff Information Services Asset and Liability Management Journals o Journal of Asset Management .com NEWSPAPERS/MAGAZINES The Financial Express Business Today Asset and Liability Management Magazines o Bank Asset/Liability Management .WEBSITES www.timesofindia.Palgrave Macmillan Asset and Liability Management Internet o ALM Professional .scribd.

Ensure those appointed to the ALM committee have the necessary knowledge and experience to perform their tasks. .Dos and Don’tss Do • • • Talk to one of the many consultancy firms that specialize in ALM. and that can advise on establishing an ALM committee and improving its performance. Don’t forget that risks are constantly changing and developing. Make sure your ALM committee has the skills to deal with the latest developments . Don’t • • Don’t seek to cut costs in terms of investing in management tools and personnel. Constantly monitor the performance of your committee.

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