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Asset Liability Management

 Systematic approach to minimize risks
due to asset liability mismatch
 Manage Balance Sheet
 Alternative Interest Rate Scenario

 Alternative Liquidity Scenario

 ALM to quantify and manage risks

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Asset Liability Management

 Liability management –
 Liquidity concerns
 Interest rate movements

 ALM for long-term susvival and profitability

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 Management of Assets
 Interest rate
 Maturity structure
 Quality of assets
 Reserve . provision requirement
 Match risk & return
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 Management of Liabilities
 Interest rate
 Maturity structure
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 Management of Liabilities
 Interest rate
 Maturity structure
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Liabilities Management

 Depositors
 Shareholders
 Lenders
 Central Bank - lender of last resort
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Assets Management

 Loans
 Investment
 Liquidity

 Low yielding liquid assets Vs. high yielding loans

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Objectives of ALM

 Manage
 Interest rate Risk
 Credit Risk
 Liquidity Risk
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 ALCO
 Decision making – balance sheet planning
 Pricing
 Funding mix
 Other activities
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Techniques of Assets Liability Management

 Interest rate risk

 Change in value of fixed interest rate assets
and liabilities
 Mismatch in re-pricing
 Repayment Risk

 Insurance &
 Derivatives to manage the risks
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 Interest rate change effect profitability of

banks
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Techniques of measuring
interest rate sensitivity

 Dollar Gap: Difference between interest sensitive

assets and and interest sensitive liabilities
 Duration: average lifetime of payment streams from a
security
 Duration Gap: Difference between duration of
bank’s assets and liabilities
 Simulation
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Derivative Securities

Futures
Options
Swaps