Description
asset liability management including, Maturity Gap / Cumulative Gap Models, Rate Sensitive Assets & Liabilities Gap, Using IRR Gaps, Duration Gap Analysis.
Approaches to ALM
Approaches to ALM
• Banking Portfolio
– Sensitvity
– Simulations
• Treasury Portfolio
– Sensitvity- What if analysis / Weighted Net Duration
– Simulations
– VaR techniques
• Balance Sheet as a whole
– Gap approach
Gap Analysis
• Liquidity Gaps
• Expected Cash Flows
• Interest Rate Gaps
• Maturity Gap / Cummulative Gap Models
• Rate Sensitive Assets and Rate Sensitive
Liabilities Gap Model
• Duration Gap Analysis
Maturity Gap / Cumulative Gap Models
• Dollar Value of Assets minus Dollar Value of
Liabilities as of today, and projections on various
days
• Measures NIM Change
= Gap * Change in interest rates
• Assumption of parallel shift of the yield curve
• Assumption of same change for assets and
liabilities
• Problem of maturing A & L
• Problem of Re-Sets of Variable Rate Assets and
Liabilities
Rate Sensitive Assets & Liabilities Gap
• Rate Sensitive Assets and Rate Sensitive
Liabilities
• A & l that are likely to experience changes in the
contractual rates in a " gapping period" or "time
bucket "
• Re-Set dates
• Maturing A & L requiring 'replacement by fresh A
& L @ rates as on that date
• IRR Gap =RSA / RSL or RSA - RSL
• Measures NIM Change
= Gap * Change in interest rates
Rate Sensitive Assets & Liabilities Gap
• Gap analysis
– measured by calculating Gaps over different time intervals
– mismatches between Rate Sensitive Liabilities (RSL)
and Rate Sensitive Assets (RSA)
• An asset or liability is normally classified as rate sensitive if:
• within the time interval under consideration, there is a cash
flow;
• the interest rate resets contractually during the interval;
• pre-payable or withdraw-able before the stated maturities;
• dependent on the changes in the Bank Rate by RBI
• floating rates of interest-assets and liabilities are rate sensitive at the
time of re-pricing.
• residual maturity or next re-pricing period, whichever is earlier
Rate Sensitive Assets & Liabilities Gap
• Drawbacks
• Assumption of parallel shift of the yield curve
• Assumption of same change for assets and
liabilities
• Gapping Time / Buckets could be too wide -
adjust Buckets suitably
• Analysis of interest rate sensitivity of the funding sources of
the institution eg. PDs / FI s
• Assets customers intentions -opposite of bank’s
• effect of Mark-to-Market not considered
Using IRR Gaps
• IR Expected to go down
–(-ve) Gap
–reduce RSA
–more VR loans and longer maturity debt
–shorter term deposits
• Uncertain scenario
– keep the gap to the minimum
• Transformation of the gaps can be achieved
synthetically thro use of derivatives
RBI’s stipulations
• The interest rate gaps may be identified in the following
time buckets:
• 1-28 days
• 29 days and upto 3 months
• Over 3 months and upto 6 months
• Over 6 months and upto 1 year
• Over 1 year and upto 3 years
• Over 3 years and upto 5 years
• Over 5 years and upto 7 years
• Over 7 years and upto 10 years
• Over 10 years
• Non-sensitive
RBI’s stipulations
1 m 1-3m 3-6m 6m-1y 1-5yr >5yr Non-Sen
Capital
Deposits
Borrowings
Others
LIABILITIES
Cash etc
Investment
Advances
Lendings
Assets
FRA/Swap
GAPS
A R B L Ladder
Maturity To be 'repriced' ARBL
Bucket Assets Liabilities A-L
< 1m
1m
2m
3m
1yr
> 1yr
•Rates expected to go up : + ve ARBL
•Rates expected to go down : - ve ARBL
•Rates unpredictable : zero ARBL
Duration Gap Analysis
• Since duration is cumulative /additive the concept
can be applied to the balance sheet as a whole
• Total duration is the sum of durations each
weighted with its proportion in of the total
portfolio dollar value
• .
( )
gap L A
gap
D
A
L
D D
i
i
A D E
=
|
.
|
\
|
÷
+
A
÷ = A
* where
1
* * * ) (
Duration Gap Analysis
• Instead of changing the maturity profile of the
Assets and Liabilities, duration gap analysis can
achieve the same thing by changing the % mix of
the assets and liabilities in the portfolio
• Parallel shift of yield curve
• Duration of liabilities?
• Duration of banking portfolio ?
| |
( )
( )
( )
1
*
D duration * ... * 3 * 2 * 1
1
* * ... * 3 * 2 * 1
1
* * ... * 3 * 2 * 1
*
) 1 (
... *
) 1 (
3 *
) 1 (
2 *
) 1 (
1
* ...... .......... * * *
..........
..........
(1)
) 1 (
) 1 (
) 1 (
) 1 (
) 1 (
) 1 (
3 2 1
3 2 1
3 2 1
3 2 1
3
3
3
2
2
2
1
1
1
3 2 1
3 2 1
1
i
i
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P
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P
P
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P
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P
P
P
P
P
P
P
i
i
P n P P P P
P
i
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i
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P
i
i
P
i
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P
P
P
P
P
P
P
P
P
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P
P
P
P
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P P P P P
i
i
n
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dp
i
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di
dP
i nA
di
dP
i A P
i P A
n
n
n
n
n
n
n
n
n
n
n
n
+
A
÷ =
A
=
(
¸
(
¸
+ + + +
+
A
(
¸
(
¸
+ + + + ÷ =
A
+
A
+ + + = A
(
¸
(
¸
+
A
÷ + +
(
¸
(
¸
+
A
÷ +
(
¸
(
¸
+
A
÷ +
(
¸
(
¸
+
A
÷ = A
A
+ +
A
+
A
+
A
= A
A + + A + A + A = A
+ + + =
+
A
÷ =
A
+
÷ =
+
÷ =
+ ÷ =
+ =
+ =
÷ ÷
÷
( )
( )
( ) ( )
( )
( )
( )
( )
gap L A gap
L A
L A
L A
D
A
L
D D
i
i
A D E
i
i
A
A
L
D D E
i
i
L D A D E
L
i
i
D A
i
i
D E
L
L
L
A
A
A
E
L A E
L A E
Liability Assets Equity
i
i
D
L
L
i
i
D
A
A
=
|
.
|
\
|
÷
+
A
÷ = A
+
A
|
.
|
\
|
÷ ÷ = A
+
A
÷ ÷ = A
|
|
.
|
\
|
+
A
÷ ÷
|
|
.
|
\
|
+
A
÷ = A
A
÷
A
= A
A ÷ A = A
÷ =
÷ =
+
A
÷ =
A
+
A
÷ =
A
* where
1
* * * ) (
1
* * * * ) (
1
* * * * ) (
*
1
* *
1
*
* *
1
*
1
*
doc_719536532.ppt
asset liability management including, Maturity Gap / Cumulative Gap Models, Rate Sensitive Assets & Liabilities Gap, Using IRR Gaps, Duration Gap Analysis.
Approaches to ALM
Approaches to ALM
• Banking Portfolio
– Sensitvity
– Simulations
• Treasury Portfolio
– Sensitvity- What if analysis / Weighted Net Duration
– Simulations
– VaR techniques
• Balance Sheet as a whole
– Gap approach
Gap Analysis
• Liquidity Gaps
• Expected Cash Flows
• Interest Rate Gaps
• Maturity Gap / Cummulative Gap Models
• Rate Sensitive Assets and Rate Sensitive
Liabilities Gap Model
• Duration Gap Analysis
Maturity Gap / Cumulative Gap Models
• Dollar Value of Assets minus Dollar Value of
Liabilities as of today, and projections on various
days
• Measures NIM Change
= Gap * Change in interest rates
• Assumption of parallel shift of the yield curve
• Assumption of same change for assets and
liabilities
• Problem of maturing A & L
• Problem of Re-Sets of Variable Rate Assets and
Liabilities
Rate Sensitive Assets & Liabilities Gap
• Rate Sensitive Assets and Rate Sensitive
Liabilities
• A & l that are likely to experience changes in the
contractual rates in a " gapping period" or "time
bucket "
• Re-Set dates
• Maturing A & L requiring 'replacement by fresh A
& L @ rates as on that date
• IRR Gap =RSA / RSL or RSA - RSL
• Measures NIM Change
= Gap * Change in interest rates
Rate Sensitive Assets & Liabilities Gap
• Gap analysis
– measured by calculating Gaps over different time intervals
– mismatches between Rate Sensitive Liabilities (RSL)
and Rate Sensitive Assets (RSA)
• An asset or liability is normally classified as rate sensitive if:
• within the time interval under consideration, there is a cash
flow;
• the interest rate resets contractually during the interval;
• pre-payable or withdraw-able before the stated maturities;
• dependent on the changes in the Bank Rate by RBI
• floating rates of interest-assets and liabilities are rate sensitive at the
time of re-pricing.
• residual maturity or next re-pricing period, whichever is earlier
Rate Sensitive Assets & Liabilities Gap
• Drawbacks
• Assumption of parallel shift of the yield curve
• Assumption of same change for assets and
liabilities
• Gapping Time / Buckets could be too wide -
adjust Buckets suitably
• Analysis of interest rate sensitivity of the funding sources of
the institution eg. PDs / FI s
• Assets customers intentions -opposite of bank’s
• effect of Mark-to-Market not considered
Using IRR Gaps
• IR Expected to go down
–(-ve) Gap
–reduce RSA
–more VR loans and longer maturity debt
–shorter term deposits
• Uncertain scenario
– keep the gap to the minimum
• Transformation of the gaps can be achieved
synthetically thro use of derivatives
RBI’s stipulations
• The interest rate gaps may be identified in the following
time buckets:
• 1-28 days
• 29 days and upto 3 months
• Over 3 months and upto 6 months
• Over 6 months and upto 1 year
• Over 1 year and upto 3 years
• Over 3 years and upto 5 years
• Over 5 years and upto 7 years
• Over 7 years and upto 10 years
• Over 10 years
• Non-sensitive
RBI’s stipulations
1 m 1-3m 3-6m 6m-1y 1-5yr >5yr Non-Sen
Capital
Deposits
Borrowings
Others
LIABILITIES
Cash etc
Investment
Advances
Lendings
Assets
FRA/Swap
GAPS
A R B L Ladder
Maturity To be 'repriced' ARBL
Bucket Assets Liabilities A-L
< 1m
1m
2m
3m
1yr
> 1yr
•Rates expected to go up : + ve ARBL
•Rates expected to go down : - ve ARBL
•Rates unpredictable : zero ARBL
Duration Gap Analysis
• Since duration is cumulative /additive the concept
can be applied to the balance sheet as a whole
• Total duration is the sum of durations each
weighted with its proportion in of the total
portfolio dollar value
• .
( )
gap L A
gap
D
A
L
D D
i
i
A D E
=
|
.
|
\
|
÷
+
A
÷ = A
* where
1
* * * ) (
Duration Gap Analysis
• Instead of changing the maturity profile of the
Assets and Liabilities, duration gap analysis can
achieve the same thing by changing the % mix of
the assets and liabilities in the portfolio
• Parallel shift of yield curve
• Duration of liabilities?
• Duration of banking portfolio ?
| |
( )
( )
( )
1
*
D duration * ... * 3 * 2 * 1
1
* * ... * 3 * 2 * 1
1
* * ... * 3 * 2 * 1
*
) 1 (
... *
) 1 (
3 *
) 1 (
2 *
) 1 (
1
* ...... .......... * * *
..........
..........
(1)
) 1 (
) 1 (
) 1 (
) 1 (
) 1 (
) 1 (
3 2 1
3 2 1
3 2 1
3 2 1
3
3
3
2
2
2
1
1
1
3 2 1
3 2 1
1
i
i
D
P
P
P
P
n
P
P
P
P
P
P
i
i
P
P
n
P
P
P
P
P
P
P
P
i
i
P n P P P P
P
i
i
n P
i
i
P
i
i
P
i
i
P
P
P
P
P
P
P
P
P
P
P
P
P
P
P P P P P
P P P P P
i
i
n
P
P
i
di
n
P
dp
i
P
n
di
dP
i nA
di
dP
i A P
i P A
n
n
n
n
n
n
n
n
n
n
n
n
+
A
÷ =
A
=
(
¸
(
¸
+ + + +
+
A
(
¸
(
¸
+ + + + ÷ =
A
+
A
+ + + = A
(
¸
(
¸
+
A
÷ + +
(
¸
(
¸
+
A
÷ +
(
¸
(
¸
+
A
÷ +
(
¸
(
¸
+
A
÷ = A
A
+ +
A
+
A
+
A
= A
A + + A + A + A = A
+ + + =
+
A
÷ =
A
+
÷ =
+
÷ =
+ ÷ =
+ =
+ =
÷ ÷
÷
( )
( )
( ) ( )
( )
( )
( )
( )
gap L A gap
L A
L A
L A
D
A
L
D D
i
i
A D E
i
i
A
A
L
D D E
i
i
L D A D E
L
i
i
D A
i
i
D E
L
L
L
A
A
A
E
L A E
L A E
Liability Assets Equity
i
i
D
L
L
i
i
D
A
A
=
|
.
|
\
|
÷
+
A
÷ = A
+
A
|
.
|
\
|
÷ ÷ = A
+
A
÷ ÷ = A
|
|
.
|
\
|
+
A
÷ ÷
|
|
.
|
\
|
+
A
÷ = A
A
÷
A
= A
A ÷ A = A
÷ =
÷ =
+
A
÷ =
A
+
A
÷ =
A
* where
1
* * * ) (
1
* * * * ) (
1
* * * * ) (
*
1
* *
1
*
* *
1
*
1
*
doc_719536532.ppt