Professional Documents
Culture Documents
ALM
ALM
MANAGEMENT
INTRODUCTI
ON
Asset and liability management(often abbreviated ALM) is the
practice of managingrisksthat arise due to mismatches between
theassetsandliabilities.
Initially pioneered by Anglo-Saxon financial institutions during
the 1970s
In India it was introduced on 1st April 1999
EVOLUTI
ON
Demand
and
Savings
Deposits
1940s
1980s
Volatility in
Interest
rates
Focus on
both sides
of Balance
sheet
2000s
SCOPE OF
ALM
Liquidity Risk
Interest rates Risk
Currency risk management
Funding and Capital Management
Profit Planning and growth
The
parameters
for
stabilizing
system are:
1. Net Interest Income (NII)
2. Net Interest Margin (NIM)
3. Economic Equity Ratio
ALM
ALM Organization
The board should have overall responsibilities and should set
the limit for liquidity, interest rate, foreign exchange and equity
price risk
The Asset - Liability Committee (ALCO)
ALCO, consisting of the bank's senior management (including
CEO) should be responsible for ensuring adherence to the
limits set by the Board
Is responsible for balance sheet planning from risk - return
perspective including the strategic management of interest
rate and liquidity risks
The role of ALCO includes product pricing for both deposits
and advances, desired maturity profile of the incremental
assets and liabilities,
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, wholesale vs retail deposits, money
market vs capital market funding, domestic vs foreign
ALM PROCESS
Liquidity Risk Management
Liquidity Tracking
Banks liquidity management is the process of generating funds
to meet contractual or relationship obligations at reasonable
prices at all times
Liquidity Management is the ability of bank to ensure that its
liabilities are met as they become due
Liquidity positions of bank should be measured on an ongoing
basis
A standard tool for measuring and managing net funding
requirements, is the use of maturity ladder and calculation of
cumulative surplus or deficit of funds as selected maturity dates
is adopted
Time Buckets
i.
1 to 14 days
ii. 15 to 28 days
iii. 29 days and up to 3 months
iv. Over 3 months and up to 6 months
v. Over 6 months and up to 1 year
vi. Over 1 year and up to 3 years
vii. Over 3 years and up to 5 years
viii. Over 5 years
CRR/SLR Requirement
Every financial institute is required to maintain a
Cash Reserve Ratio (CRR) and Statutory Liquidity
reserve (SLR)
Banks are given freedom to place the mandatory
securities in any time buckets as suitable for them.
Time Bucket Mismatch
the main focus should be on the short-term
mismatches viz., 1-90 days.
The cumulative mismatches (running total) across
all time buckets shall be monitored in accordance
with internal prudential limits set by ALCO from
time to time.
The mismatches during 1-90 days, in normal
course, should not exceed 15% of the cash
outflows in this time buckets.
Gap Analysis
Difference between Rate-sensitive
Assets (RSA) and Rate-sensitive
Liabilities (RSL) for each timebucket.
RSA > RSL indicates a Positive Gap.
RSA < RSL indicates a Negative Gap.
RSA = RSL indicates Zero Gap
Gap Analysis
Indicates whether the company is in
a position to benefit from rising
interest rates by having a positive
gap or from declining interest rates
by having a negative gap.
Thus, the Gap Report can be used as
a measure of Interest-rate Sensitivity.
THANK
YOU
Assets
1.
2.
3.
4.
5.
Capital
Reserve & Surplus
Deposits
Borrowings
Other Liabilities