Borc PPT Nu 15 N 16

Rate Sensitive assets & Liabilities
• What is (Rate Sensitive assets & Liabilities) RSA and RSL in banking?
• RSA = all the assets that mature or are repriced within the. gapping
period (maturity bucket)
• RSL = all the liabilities that mature or are repriced within. the gapping
period (maturity bucket)
Rate Sensitive assets & Liabilities….contd.
• What is an example of a rate sensitive liability?
• Examples of interest-sensitive liabilities include money market
certificates, savings accounts, and the NOW (Payable immediately)
account. Money market certificates have high liquidity and very short
maturities, ranging in duration from overnight to just under a year.
• What are the examples of rate sensitive assets?
• Rate sensitive assets are bank assets, mainly bonds, loans and leases,
and the value of these assets is sensitive to changes in interest rates;
these assets are either repriced or revalued as interest rates change.
• What is the interest rate sensitivity gap?
• The interest rate sensitivity gap compares the amount of assets and
liabilities in each time period in the interest rate sensitivity gap table.
This comparison gives an approximate view of the interest rate risk of
the balance sheet being analyzed.
• What is the weighted interest-sensitive gap formula?
• The interest-sensitive gap is evaluated by multiplying the dollar amount
of the liabilities and assets by their weight. A weighted interest-
sensitive gap is established as a result of the difference between the
total interest-sensitive liabilities and the total interest-sensitive assets.
• Risk-weighted assets are the loans and other assets of a bank,
weighted (that is, multiplied by a percentage factor) to reflect their
respective level of risk of loss to the bank.
• Risk-weighted liabilities are actually all liabilities as they carry certain
percentage of interest payable on maturity or otherwise.
Bank Liquidity & Management
• What is liquidity management in banks?
• Liquidity Management refers to the services a Bank provides to its
corporate customers thereby allowing them to optimize interest on
their checking/current accounts and pool funds from different
accounts. Corporate customers can, therefore, manage the daily
liquidity in their business in a consolidated way.
Bank Liquidity & Management….contd.
• INTRODUCTION
• Liquidity is a critical consideration for any business. Having enough
financial resources available to meet the company’s commitments is
essential to the health of the organization – so it’s important to manage
liquidity effectively and ensure that cash is in the right place at the right
time. Corporate treasury and finance teams that prioritize liquidity
planning and controls have an advantage over those that do not. And in
order to make better decisions about firm liquidity, first require visibility
of the company’s cash position, both now and in the future.
• So what is liquidity management? And what steps should companies take
to manage their liquidity as efficiently and effectively as possible?
• Liquidity management definition
• Liquidity is the term used to describe the liquid assets/cash a company can use to meet its
current and future debts and other obligations, such as payments for goods and services. Some
assets are liquid, meaning that cash can be readily accessed whenever it is needed. But other
types of assets, such as longer-term investments, may take longer to convert into cash – and if
such an asset has to be sold very quickly due to an unexpected shortfall, the company may end
up losing some of that asset’s value.
• The goal of liquidity management is to ensure the business has cash available when needed.
This is achieved by managing the company’s liquidity as effectively and efficiently as possible.
For companies that operate in multiple countries and currencies, and hold accounts with many
different financial institutions, managing liquidity can be particularly complex. Effective bank
liquidity management means using a centralized process to obtain full visibility over the
company’s liquidity. Efficiency, meanwhile, can be achieved by using new methods to improve
connectivity with sources of information about the company’s cash.
contd.----
An important part of liquidity management is the use of techniques
such as cash flow modeling. This can be used to provide the CFO,
corporate treasury team and finance team with full visibility over the
company’s liquidity. It is also important to have full visibility over the
lines of credit available for short-term borrowing, including balances
and limits – otherwise companies won’t know how much can be drawn
from a particular line of credit. Liquidity management also involves
managing the risk that the company will not have enough liquidity
available to meet its upcoming obligations on time. This is a very real
risk: even a profitable company can fail if it lacks the cash it needs to
meet its commitments. Contd.---
• Tracking liquidity
• Maintaining proper levels of business liquidity is dependent on having a clear
view over upcoming obligations, and also understanding how quickly assets
can be converted into cash in order to pay for the company’s short-term,
medium-term and long-term obligations. This is both an art and a science.
• Where short-term liquidity is concerned, the focus is on understanding how
fast the company’s short-term assets can be converted into cash. For medium
and long-term assets, meanwhile, the goal is to match the maturity of the
company’s investments as closely as possible with the timings of upcoming
obligations so that cash will be available when needed.
Contd.---
• Managing the different moving parts can be a complex exercise. As
such, there are a variety of approaches of liquidity management.
Corporate treasury and finance teams can use a toolkit of metrics to
help them understand:
• Appropriate levels of liquidity that need to be maintained in order to
meet upcoming obligations.
• Policies and guidelines that are needed to help guide the decision-
making process.
• Ongoing monitoring of factors such as liquidity KPIs and market risks.
contd.-----
• How to mitigate liquidity risk
• Corporate treasuries must consider many different types of risk in conjunction
with the bank liquidity management strategy. Some examples include:
• Liquidity risk. The risk that the company does not have sufficient liquidity
available to cover its short-term needs. While this can be addressed by raising
cash through credit lines or by selling short-term securities, there may be
occasions when companies can’t access additional liquidity from external
sources.
• Market risk. The risk that changes in prices or interest rates in financial markets
will adversely affect the company’s ability to access liquidity. For example,
certain markets can dry up during times of crisis.
Contd.----
• Credit risk. The risk that changes to the quality of a company’s credit
can affect the value of its portfolio or investments.
• Operational risk. Operational risks such as the risk of fraud or human
error can also result in financial loss.
• All of these risks can affect the company’s liquidity position in
different ways. Corporate treasury teams use a variety of different
strategies to manage the risks faced by the organization, and protect
the company’s cash from any negative or adverse changes.
contd.------
1. Cash flow modeling/forecasting
• In order to manage the firm’s liquidity effectively, corporate treasury and
finance teams need to have a clear view of the company’s cash position, as this
will help them identify any liquidity gaps that need to be addressed. This means
finding a solution for fast cash positioning and carrying out real-time cash
modeling and forecasting.
• Real-time cash flow modeling provides corporate treasury and finance teams
with instant access to information about cash inflows of all types, as well as the
company’s liquidity options and how quickly these can be converted into cash.
Cash flow modeling helps companies to gain a clearer understanding of their
accounts receivable, which can be a valuable source of liquidity.
contd.------
It also gives the company an opportunity to offer support to customers and
suppliers when needed using tools such as extended payment terms and early
payments:
• Offering extended payment terms can give small business clients more time to
pay.
• Paying suppliers early can give them extra support during times of adversity,
such as the pandemic.
• In addition, some corporate treasury and finance teams that fared better during
the pandemic decided to use their excess funds to pay down debt. This wasn’t
restricted to typical debt: some companies opted to pre-fund their retirement
and medical obligations in order to put themselves on a better financial footing
in the future. contd.------
SOUND PRACTICES FOR MANAGING LIQUIDITY IN BANKING ORGANISATIONS:
I. Introduction
1. Liquidity, or the ability to fund increases in assets and meet obligations as they
come due, is crucial to the ongoing viability of any banking organization. .
2. In its work on the supervision of liquidity, the Basel Committee has focused on
developing a greater understanding of the way in which banks manage their
liquidity on a global, consolidated basis. Recent technological and financial
innovations have provided banks with new ways of funding their activities and
managing their liquidity. In addition, a declining ability to rely on core deposits,
increased reliance on wholesale funds, and recent turmoil in financial markets
globally have changed the way banks view liquidity.
contd.---
3. In light of the fact that standard practices for managing bank liquidity have
changed since publication of its September 1992 paper “A framework for measuring
and managing liquidity” , the Basel Committee is issuing this updated paper. This
paper sets out several principles that highlight the key elements for effectively
managing liquidity.
4. The formality and sophistication of the process used to manage liquidity depends
on the size and sophistication of the bank, as well as the nature and complexity of
its activities. While the paper focuses on large banks, the principles have broad
applicability to all banks. In particular, good management information systems,
analysis of net funding requirements under alternative scenarios, diversification of
funding sources, and contingency planning are crucial elements of strong liquidity
management at a bank of any size or scope of operations. contd.------

5. As with several other papers recently issued by the Basel Committee, this
paper is organized around several key principles for managing liquidity. These
principles are as follows:
Principle 1: Each bank should have an agreed strategy for the day-to-day
management of liquidity. This strategy should be communicated throughout the
organization.
Principle 2: A bank’s board of directors should approve the strategy and
significant policies related to the management of liquidity. The board should also
ensure that senior management takes the steps necessary to monitor and
control liquidity risk. The board should be informed regularly of the liquidity
situation of the bank and keep itself updated.
contd.-----
Principle 3: Each bank should have a management structure in place to
execute effectively the liquidity strategy. This structure should include
the ongoing involvement of members of senior management. Senior
management must ensure that liquidity is effectively managed, and
that appropriate policies and procedures are established to control and
limit liquidity risk.
Principle 4: A bank must have adequate information systems for
measuring, monitoring, controlling and reporting liquidity risk. Reports
should be provided on a timely basis to the bank’s board of directors,
senior management etc. contd.----
Principle 5: Each bank should establish a process for the ongoing
measurement and monitoring of net funding requirements.
Principle 6: A bank should analyze liquidity utilizing a variety of “what
if” scenarios.
Principle 7: A bank should review frequently the assumptions utilized in
managing liquidity to determine that they continue to be valid.
Principle 8: Each bank should periodically review its efforts to establish
and maintain relationships with liability holders, to maintain the
diversification of liabilities, and aim to ensure its capacity to sell assets.
contd.----
Principle 9: A bank should have contingency plans in place that address
the strategy for handling liquidity crises and include procedures for
making up cash flow shortfalls in emergency situations.
Principle 10: Each bank should have a measurement, monitoring and
control system for its liquidity positions in the major currencies in
which it is active. In addition to assessing its aggregate foreign currency
liquidity needs and the acceptable mismatch in combination with its
domestic currency commitments, a bank should also undertake
separate analysis of its strategy for each currency individually.
contd.------
Principle 11: Subject to the analysis undertaken according to Principle
10, a bank should, where appropriate, set and regularly review limits on
the size of its cash flow mismatches over particular time horizons for
foreign currencies in aggregate and for each significant individual
currency in which the bank operates.
Principle 12: Each bank must have an adequate system of internal
controls over its liquidity risk management process. A fundamental
component of the internal control system involves regular independent
reviews and evaluations of the effectiveness of the system.
contd.-----
Principle 13: Each bank should have in place a mechanism for ensuring that
there is an adequate level of disclosure of information about the bank in
order to manage public perception of the organization and its soundness.
Principle 14: Supervisors should conduct an independent evaluation of a
bank’s strategies, policies, procedures and practices related to the
management of liquidity. Supervisors should require that a bank has an
effective system in place to measure, monitor and control liquidity risk.
Supervisors should obtain from each bank sufficient and timely information
with which to evaluate its level of liquidity risk and should ensure that the
bank has adequate liquidity contingency plans.
contd.-----
• III. Foreign Currency Liquidity Management
• Following the currency problems in a number of markets in the 1990s, it is now
clear that, for banks with an international presence, the treatment of assets and liabilities in
multiple currencies adds a layer of complexity to liquidity management for two reasons. First,
banks are often less well known to liability holders in foreign currency markets. Therefore, in
the event of market concerns, especially if they relate to a bank's domestic operating
environment, these liability holders may not be able to distinguish rumor from fact as well or
as quickly as domestic currency customers. Second, in the event of a disturbance, a bank may
not always be able to mobilize domestic liquidity and the necessary foreign exchange
transactions in sufficient time to meet foreign currency funding requirements.
-End-
What is Basel full form?
Basel I is a set of international banking regulations established by
the Basel Committee on Banking Supervision (BCBS). It prescribes
minimum capital requirements for financial institutions, with the goal
of minimizing credit risk.
Which is a source of liquidity risk at a bank?
The mismatch between banks' short-term funding and long-term
illiquid assets creates inherent liquidity risk. This is aggravated by a
reliance on flighty wholesale funding and the potential for sudden
unexpected demands for liquidity by depositors.
• What is the Basel III liquidity framework?
• Basel III aims to strengthen the requirements in the Basel II regulatory
standards for banks. In addition to increasing capital requirements, it
introduces requirements on liquid asset holdings and funding stability,
thereby seeking to mitigate the risk of a run on the bank.
• What are Basel III liquidity reforms?
• The Basel III reforms, including the new global liquidity standards,
are the response of banking supervisors to deficiencies in the
regulatory framework identified during the global financial crisis.
contd.---
What are the 3 pillars of Basel?
• Basel regulation has evolved to comprise three pillars concerned with minimum capital
requirements (Pillar 1), supervisory review (Pillar 2), and market discipline (Pillar 3).
Today, the regulation applies to credit risk, market risk, operational risk and liquidity risk.
• Pillar 1: Capital Adequacy Requirements
• Pillar 1 improves on the policies of Basel I by taking into consideration operational risks
in addition to credit risks associated with risk-weighted assets (RWA). It requires banks
to maintain a minimum capital adequacy requirement of 8% of its RWA. Basel II also
provides banks with more informed approaches to calculate capital requirements based
on credit risk, while taking into account each type of asset’s risk profile and specific
characteristics.
Contd.-----
• Pillar 2: Supervisory Review
• Pillar 2 was added owing to the necessity of efficient supervision and lack thereof
in Basel I, pertaining to the assessment of a bank’s internal capital adequacy.
Under Pillar 2, banks are obligated to assess the internal capital adequacy for
covering all risks they can potentially face in the course of their operations.
• Pillar 3: Market Discipline
• Pillar 3 aims to ensure market discipline by making it mandatory to disclose
relevant market information. This is done to make sure that the users of financial
information receive the relevant information to make informed trading decisions
and ensure market discipline.
• -End-
About Moody’s Analytics Liquidity Management Solutions Risk Authority Liquidity Compliance
Module – Complete Basel III Ratio Calculations (LCR and NSFR) Risk Authority Liquidity Compliance
offers comprehensive compliance with Basel III liquidity risk requirements. It allows banks to
calculate the new Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR) and all the
relevant risk indicators required to populate Basel III regulatory Pillar 1 and 3 risk reports as outlined
in the BCBS December 2010 Paper entitled Basel III: International framework for liquidity risk
measurement, standards and monitoring. With Risk Authority Liquidity Compliance, you can be
confident that you are managing your organization’s regulatory liquidity requirements, on time,
every time. Risk Authority supports over 50 national supervisors to allow you to manage all of your
multijurisdictional regulatory requirements. Risk Confidence Liquidity Monitoring Risk Confidence,
Moody’s Analytics enterprise asset and liability management software solution, goes beyond the
traditional ALM feature set by creating a high value front office balance sheet management function
that enables firms to evaluate efficient portfolios in order to maximize risk-adjusted returns. Risk
Confidence incorporates interest rate risk management, credit risk management, liquidity risk
management, capital management, and performance measurement.
• What is the Basel III liquidity framework?
• Basel III aims to strengthen the requirements in the Basel II regulatory
standards for banks. In addition to increasing capital requirements, it
introduces requirements on liquid asset holdings and funding stability,
thereby seeking to mitigate the risk of a run on the bank.
• Liquidity Coverage Ratio (LCR) is a requirement under Basel III
whereby banks are required to hold enough high-quality liquid assets
to fund cash outflows for 30 days. Basel III is a set of reform measures
intended to improve regulation, supervision, and risk management in
the international banking sector.
• What is the concept of liquidity management?
• Liquidity management is the proactive process of ensuring a Bank has
the cash on hand to meet its financial obligations as they come due. It
is a critical component of financial performance as it directly impacts
a company's working capital.
• What are two Basel III methodologies currently used to manage
liquidity risk?
• Key components of Basel III include the Liquidity Coverage Ratio (LCR)
and the Net Stable Funding Ratio (NSFR).
• What is LCR in Basel III?
The LCR requirements are designed to ensure banks maintain an adequate level
of readily available, high-quality liquid assets (HQLA), that can quickly and easily
be converted into cash to meet any liquidity needs that might arise during a 30-
day period of liquidity stress.
• What is a good LCR ratio?
• Liquidity Coverage Ratio The standard requires that, absent a situation of
financial stress, the value of the ratio be no lower than 100%1 (ie the stock of
HQLA should at least equal total net cash outflows). Banks are expected to meet
this requirement on an ongoing basis and hold a stock of unencumbered HQLA as
a hedge against the potential onset of liquidity stress.
contd.---
• What is LCR formula?
• LCR = High-Quality Liquid Asset Amount (HQLA) / Total Net Cash Flow
Amount. So, to calculate the LCR (liquidity coverage ratio), you'll need
to divide the bank's high-quality liquid assets by their total net cash
flows over the course of a specific, 30-day stress period.
contd.---
• What is NSFR in Basel III?
• Net Stable Funding Ratio. Summary. The Basel Committee
(Committee) released the final standard on Net Stable Funding Ratio
(NSFR) – the long-term liquidity risk management measure to ensure
a stable funding structure within banks.
• How is the NSFR calculated?
• The NSFR presents the proportion of long term assets funded by
stable funding and is calculated as the amount of Available Stable
Funding (ASF) divided by the amount of Required Stable Funding (RSF)
over a one-year horizon. Contd.-----
• What is the NSFR limit?
• 100%
Available Stable Funding / Required Stable Funding >100%
The BCBS (The Basel Committee on Banking Supervision is the primary
global standard setter for the prudential regulation of banks )
recommended limit for NSFR is a minimum of 100%.
Thank You (15)
Treasury Management
• What is treasury in simple words?
• a place where the funds of the government, of a corporation, or the like are
deposited, kept, and disbursed. funds or revenue of a government, public
or private corporation, etc.
• What does treasury mean in finance?
• Treasury involves the management of money and financial risks in a
business. Its priority is to ensure the business has the money it needs to
manage its day-to-day business obligations, while also helping develop its
long term financial strategy and policies.
Treasury Management…..contd.
• What is the role of a treasury?
• Advising on domestic and international financial, monetary, economic, trade
and tax policy; Enforcing finance and tax laws; Investigating and prosecuting
tax evaders and forgers etc.
• What is treasury in a company?
• It allocates financial resources, raises funding and capital to support firm
activity, and manages the firm's asset liability risk and liquidity portfolio.
Corporate Treasury actively engages in public markets and with businesses
across the firm, investors, ratings agencies and regulators.
Treasury Management…..contd.
• What is treasury process?
• Treasury management is the process of managing an organization's
financial resources in order to achieve its strategic and operational
objectives. It encompasses a wide range of activities, including cash
management, funding and investment management, trade finance, risk
management, and working capital management.
• What is treasury role in banking?
• The Treasury Team is assures that the bank's books balance daily and
that there is sufficient cash to settle outstanding contracts, with any
excess cash lent out at the best available rates.
Treasury Management in Banks
• BANK TREASURY
• Each Treasury function is similar, whether it’s a corporate Treasury or a Bank Treasury. Once you
understand the concept of one, you can easily apply it to the other. The Treasury team is a critical
part of a bank’s wholesale banking department and plays a vital role in maintaining a healthy P&L.
• The Treasury Team is mainly responsible for:
• Ensuring that the bank’s books balance daily and that there is sufficient cash to settle outstanding
contracts, with any excess cash lent out at the best available rates.
• Balancing and managing daily cash flows, investments, debt profiles, bank liquidity, reserve
management, asset/liability management, risk management, and more.
• Providing Treasury solutions to the bank’s customers, such as Corporate Treasuries.
In short, Bank Treasury is the backbone of the organization. They ensure that the bank functions in
compliance with all banking regulations, and is not caught off guard during any crisis, while also
aiming for maximum return on investment. Contd.---
Treasury Management in Banks….contd.
• ROLES A TREASURY TEAM PLAYS IN A BANK
• I. Asset Liability Management (ALM)
• A bank’s assets are the ones owned by the bank, such as cash, government securities,
loans (earning interest), money market instruments, equities, and reserves, etc. Liabilities
refer to debt obligations, like borrowings from other banks/financial institutions, market
borrowings (bonds), etc. Intuitively, anyone will try to obtain a higher yield while keeping
borrowing costs very low. But there are so many other considerations, and this is where
the ALM team comes into the picture. They ensure that the mismatch between the tenor,
interest rates, floating/fixed rates, amount of these assets, and liabilities is minimized
with limited risk. The team is in constant action so that the cheaper short-term
borrowings and excellent long-term interest-paying loans mismatch only to a limit so that
banks remain sturdy in a scenario where liquidity dries up immediately.
contd.-----
• II. Balance Sheet Management (BSM)
• In response to the financial crisis of 2008, Basel III norms were introduced,
which had more stringent regulations than the previous two norms. They
aimed to strengthen banking systems where banks were undercapitalized,
overleveraged, and depended mostly on short-term funding. They came up
with capital adequacy ratios, leverage, and liquidity coverage ratios that a
bank must have. A bank’s treasury has a crucial role to play here in balance
sheet management by suggesting which currencies and terms are favorable
from a funding perspective and which assets are required to meet various
regulatory targets. contd.----
• III. Trading and Hedging
• A complex function that keep Bank on their toes, be on top of what is happening in the
world, and how each news is moving the interest rates/exchange rates, and what you
should do to minimize the risk. If you are in a bank that has liabilities in one currency and
assets in another, then you must make sure that you do not land in a situation where the
asset currency becomes weaker, which may distort the risk and reduce the profitability of
the bank. For this, you have derivative hedges – different types of hedges (swaps, options,
structured products). You also need to do spot transactions where you buy and sell
currency on a spot basis for the immediate needs (payment obligations, etc.) of the bank.
• This team ensures that they take advantage of daily market variations through various
trading activities. They hedge open positions (for mitigating exchange rate/interest rate
risk), execute back-to-back deals for corporate treasuries, perform merchant transactions,
trade in currency futures, hedge the bank’s balance sheet, and transact in interest rate
futures. contd.-----
• IV. Treasury Operations
• The operations team is very crucial when it comes to a bank’s
adherence to regulations and making sure that all the legal
documentation is documented for audit purposes. They liaise with the
different teams to ensure that the processes are followed according
to the rules and regulations. They are the ones responsible for
reporting, ensuring SWIFT payments, confirming deals, settling and
confirming treasury transactions in a timely manner. They cover the
settlement and squaring of nostro accounts, that is, the accounts
banks have with other banks, alongside collateral movements, and
accounts with the Central Bank.
• CONCLUSION
• In summary, the treasury function is an integral aspect of banking
institutions. It encompasses managing financial assets and liabilities,
ensuring sufficient liquidity, and capitalizing on market opportunities to
maximize profitability. Treasury management requires a combination of
analytical skills, financial expertise, and a deep understanding of the
economic landscape which can be easily developed by keeping a track of the
latest happenings in the world, how the interest rates are moving, how each
news impacts the interest rates/ exchange rates and keeping abreast of
regulatory changes etc. Moreover, regulatory and risk management
considerations are critical factors in shaping the treasury function. Banks
must balance profitability with safety and soundness. -End-
• Integrated treasury is a holistic approach to funding the balance sheet
and deployment of funds across the domestic as well as global money
and forex markets. This approach enables the bank to optimize its
asset-liability management and also capitalize on arbitrage
opportunities.
• The treasury management (or treasury operations) can be explained
as the management of the best possible use of surplus funds,
maintain liquidity, reduce the overall cost of funds, and mitigate
operational and financial risk. Contd.---
• Traditionally, banks used to have two separate departments for
treasury operations of a bank namely the domestic
treasury/investment operations of a bank and foreign exchange
treasury operations. Fundamentally they used deal with arranging the
funds whenever the bank needs the funds and to deploy the surplus
funds for profit. The treasury dealings are normally short-term funds-
flow of the bank. However, in case of SLR requirement, investment in
some securities is held to maturity exceeding one year. As a risk
management function, they cover underlying assets and liabilities
across short, medium and long-term maturities. Contd.---
• Domestic treasury:
• The domestic treasury operations were essentially meant for management of reserve
ratios, i.e., CRR and SLR (which are basically the govt. securities) and Fund
Management. Over the period, the treasury operations evolved as independent
profit centers of the banks as these operations indirectly contributes to revenue
generation of the banks.
• When the bank lends at money market or bond market, those assets become
treasury assets of the bank. On the other hand, once a bank borrows money from
the money market or bond market, it is said to have undertaken a treasury liability.
• We have to remember that the deposits received from bank customers are not
treated as treasury liability as deposits accepted by the banks are not market
borrowing. Similarly loans and advances made to customers are not treasury assets.
contd.----
• Forex treasury:
• The treasury (foreign exchange division) dealing in funding and managing
foreign currency assets and liabilities. Their main task is to provide a ‘cover’
to the customers of the bank in respect of their foreign currency exposure on
account of their merchant transactions, viz., exports, imports, remittances,
etc. In addition to that the dealing room of the banks engages in providing
different hedging and derivatives products to manage the-interest rates and
exchange risks of the customers of the bank and accordingly they do cover
operations in the inter-bank market.
• They also exploit profit through arbitrage operations such as buying currency
on the spot market and sell the same currency in the futures market if there is
a beneficial pricing discrepancy. Contd.-----
• Integration of domestic and foreign Treasury Division
• Integrated Treasury, in a banking set-up, refers to integration of
domestic and foreign exchange operations. Prior to the integration of
two departments, these departments work independently and
without any communication between them. For example, banks
borrow and lend money among them on the interbank market in
order to maintain appropriate, liquidity levels, and to meet reserve
requirements placed on them by the banking regulator. Under the
traditional system, the staff working in one department was not
aware of what the other department was doing. Contd.----
The integration of the forex dealing and domestic treasury has helped the
bank to overcome this unwanted situation as they consolidate outflow and
inflow of money both from domestic and foreign exchange operations. In the
integrated scenario, banks no longer distinguish between Rupee cash flows
and foreign currency cash flows. Further, the integrated treasury has direct
access to the various segments of the market, viz., money market, capital
market, forex market, etc. and it has an overview of the bank’s total funding
needs. They have multiple accesses to foreign currency funds through their
off-shore operations, FCNR (B), RFC, and EEFC and float funds from external
commercial borrowings (ECB) of corporate customers for funding needs.
contd.---
• Further, banks look for interest arbitrage across the currency markets and
are in a position to move quickly. Banks can also source funds in global
market and swap the funds into domestic currency, or vice versa,
depending on the market opportunities. For example, banks can make
placement of Rupee denominated commercial paper to lending in USD in
global interbank market.
• Integrated Treasury therefore is in a position to operate across the sectors
and across the currency markets, either in search of higher returns, or in
order to mobilize low-cost funds for liquidity needs. Integrated Treasury is
also fully involved in risk management, in particular, management of
market risk, often using derivative products.
-End-
Investment Portfolio of Banks
• What is Investment?
• An investment is an asset or item accrued with the goal of generating
income or recognition. In an economic outlook, an investment is the
purchase of goods that are not consumed today but are used in the
future to generate wealth. In finance, an investment is a financial
asset bought with the idea that the asset will provide income further
or will later be sold at a higher cost price for a profit.
• Investment is elucidated and defined as an addition to the stockpile
of physical capital such as Machinery, Buildings etc.
Investment Portfolio of Banks….contd.
• What is in an investment portfolio?
• An investment portfolio is a set of financial assets owned by an
investor that may include bonds, stocks, currencies, cash and cash
equivalents, and commodities. Further, it refers to a group of
investments that an investor uses in order to earn a profit while
making sure that capital or assets are preserved.
• The investment portfolio of banks : Banks will have to classify
investments into three categories - available for sale (AFS), held to
maturity (HTM) and a new category called 'fair value through profit
and loss', or FVTPL. The existing held-for-trading (HFT) category will
become a sub-category of FVTPL, as per RBI notification on12Sep23.
• What is HTM vs AFS vs HFT?
• Accounting standards require banks to classify securities as Held To
Maturity (HTM), Held For Trading (HFT), or Available For Sale (AFS) at
the time of purchase. While HTM securities are measured at cost less
loss, HFT and AFS securities are measured at fair value
• What are investment portfolio and policy guidelines followed by
banks in this respect?
• Banks are required to have an Investment Policy duly approved by
respective Boards taking into account various factors such as
investment in bonds and debentures, degree of credit risk, internal
control system, etc.
• What is prudential norms in banking sector?
• Prudential regulations refers to a set of laws and rules designed to
minimize the risks banks assume and to ensure the safety and
soundness of both individual institutions and the system as a whole.
• Why are prudential norms important?
• The main aim of prudential regulations is to increase the stability of
financial systems; however, such regulations also increase the risk-
taking tendency of banks, they encourage them to combine and limit
their lending possibilities with, at the same time, lowering the
efficiency of monetary policy.
Prudential regulatory policy has been characterised by inserting best practices as
defined by the Basle Accord into Indian banking. This approach has the weakness that it
requires substantial reliance on supervision. Second, the best practices were introduced
without bank behavioural responses to them being well understood. Third,
diversification as a means of making the banking system safer has not been explored. It
is argued that the introduction of prudential regulation turned a credit liberal regime
spawned by implicit government guarantees of bank safety and stability into a credit
constrained regime. This regime is characterised by a reduction in lending and change in
the composition of lending towards assets with a lower risk weighting such as
government securities which is a temporary stock adjustment response by banks as they
seek more sustainable balance sheet positions. Shifting from an emphasis on
supervision towards more reliance on incentives to ensure safe and sound banking it is
argued can be achieved by introducing contingent liability, structured supervision, and
diversification.
Transfer Pricing
• What do you mean by transfer pricing?
• Introduction. Transfer pricing refers to methods which determine the
price for trading in goods or services between related enterprises or
companies. Transfer pricing enables improvements in pricing, brings
in efficiency, and helps simplification of the process of accounting.
• Transfer pricing deals with determining mark up based on the costs. It
is relevant to know the costs incurred by a business enterprise, such
as transportation, packing, freight, insurance, and tax or customs
charges where applicable.
Transfer Pricing……Contd.
• An arrangement of transfer pricing is usually between related
enterprises, such as holding and subsidiary companies. The
arrangement specifies the transfer price for sale or purchase of goods
between the holding and subsidiary companies.
• The arrangement may be between two or more subsidiaries of the
parent company, or between different companies within a group. For
example, a parent company may manufacture the cars, including
assembling the body and finishing job. contd.--
• Two wholly-owned subsidiaries manufacture components, such as
brake lining and others. Transfer pricing helps in determining the
pricing of the components between the parent company and its
subsidiaries.
• Transfer pricing helps in maintaining a market for the goods
manufactured by a subsidiary with steady margins. It also helps in
securing a steady supply of raw materials or components to the
parent and facilitates continuous production. The prices fixed for
transferring goods is generally closer to the fair market price for such
goods in the market. contd.----
The system of transfer pricing is between related enterprises. Hence, it is not
beneficial to sell below or above the market price of either entities or the group as
a whole. If the goods are sold above or below the market price, it will lead to an
uneven distribution of profits between different entities within a group.
Conclusion
• Transfer pricing of goods or services deals with the arm’s length principles of
determining the prices of goods and services bought and sold between related
enterprises. The arm’s length principle essentially states that related enterprises
must fix the transfer price in line with the price that is paid by an outsider for the
same goods or services. -End-
Thank You (16)

Borc PPT Nu 15 N 16

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Borc PPT Nu 15 N 16

Uploaded by

Copyright:

Available Formats

Rate Sensitive assets & Liabilities

Thank You (16)

You might also like