Description
This is a presentation explaining Banking Reforms, Liquidity Risk Profile of a bank, Managing Risks, Risk Management, GAP Analysis, ALM process, price matching, Interest Rate Risk
Asset Liability Management
? Geographical
spread of Bank branches ? Directed Investments / Credit Programs ? Administered Rates of Interest ? Accrual based accounting ? Problems of Recovery of Loans ? Deterioration in Quality of Assets /Loans ? Erosion of Profits ? No Computerisation ? Trade Union Issues
2
? L-P-G
Policy of GOI since 1991 (Liberalisation,privatisation,globalisation) ? Technological Changes – ATMs / Internet ? New Products and Services : Competition ? Narasimham Committee - I / II on Financial / Banking Sector Reforms (1991 & 1997) ? Capital Adequacy Ratio : IRAC Norms : NPAs ? Priority Sector Loans: Reduce from 40 to 10%? ? Reduce SLR (40%) and CRR (15%) ? Benchmark Prime Lending Rates ? Enactment / Amendments to various laws
ALM 2008
Com Bkg 2008
3
? Market
determined Rates of Interest ? No directed lending or investments ? Organisational Changes : Transparency ? 4 way classification of Loan Accounts / Assets ? Provisioning for Losses o/a NPAs & Std Assets ? ALM (1999) and Risk Management, KYC in Banks ? Non Performing Assets definition revised from 4 quarters (1993) dues in Principal & Interest to 3 (1994) to 2 (1995) quarters and now from April 01, 2004 – just 90 days / 1 quarter ! ? Basel II norms for Bank Supervision from 2008!
ALM 2008
Com Bkg 2008
4
Banks Economic Factors Economic Policies
Balance Sheet of a Bank Liabilities Capital Reserves and Surplus Deposits Borrowings Other Liabilities and Provisions Contingent Liabilities Assets Cash and Balances at RBI Balance with banks and money at call and short notice Investments Advances Fixed Assets Other Assets
ALM 2008 Com Bkg 2008
5
ALM 2008
Com Bkg 2008
6
ALM 2008
Com Bkg 2008
7
ALM 2008
Com Bkg 2008
8
? Various
Risks
• Interest Rate Risk • Foreign Exchange Risk • Liquidity Risk • Credit Risk
• Contingency Risk
ALM 2008
Com Bkg 2008
9
ALM 2008
Com Bkg 2008
10
? Till
the 1980s, a professional risk manager was unheard of ? Late 1980s, US Financial Firms started using VaR ? Bank for International Settlements : Basel I ;1988 ? Risk Metrics, 1995 ? Bank for International Settlement (BIS) - a series of risk management guidelines for Banks worldwide ? Market Risk Guidelines of Basel, 1996 ? Basel II process ( November 2005 Document)
ALM 2008 Com Bkg 2008
11
?
How to bring it (Risks) down to manageable levels?
•
The 5-step process
1. 2. 3. 4. 5. Identification of risks Quantification Policy formulation Strategy formulation Monitoring
ALM 2008
Com Bkg 2008
12
? An
attempt to match: Assets and Liabilities
?
In terms of:
Maturities and Interest Rates Sensitivities
?
To minimize: Interest Rate Risk and Liquidity Risk
ALM 2008
Com Bkg 2008
13
Asset Liability Management Asset Management How Liquid are the assets of the Bank
Liability Management How easily can the Bank generate loans from market
ALM 2008 Com Bkg 2008
14
? ALM
is an integral part of the financial management process of any bank. ? ALM is concerned with strategic balance sheet management involving risks caused by changes in the interest rates, exchange rates and the liquidity position of the bank. ? While managing these three risks forms the crux of ALM, credit risk and contingency risk also form a part of the ALM
ALM 2008
Com Bkg 2008
15
? ALM
can be termed as a risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities. ? It takes into consideration interest rates, earning power, and degree of willingness to take on debt and hence is also known as Surplus Management
ALM 2008 Com Bkg 2008
16
? ALM
is all about efficient management of balance sheet dynamics with regard to its size, constituents and quality. ? It is the process of managing the Net Interest Margin (NIM) within the overall risk bearing ability of a bank ? ALM process depends on the understanding of the balance sheet; the availability, accuracy, adequacy and expediency of the data and the MIS system
ALM 2008
Com Bkg 2008
17
? One
way to measure the direction and extent of asset-liability mismatch is by using gap analysis. The analysis derives its name from the “gap” which is the difference between the amounts of Rate Sensitive Asset (RSA) and Rate Sensitive Liabilities (RSL).
ALM 2008
Com Bkg 2008
18
? Mid
1970s in the U.S.A.
Deregulation of Interest Rates
Interest Rate Risk
Liquidity Risk
Credit Risk
ALM 2008 Com Bkg 2008
19
is defined as, “the process of decision – making to control risks of existence, stability and growth of a system through the dynamic balances of its assets and liabilities.” ? The text book definition of ALM is “a risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities. It takes into consideration interest rates, earning power and degree of willingness to take on debt. It is also called surplus- management”.
? ALM
ALM 2008 Com Bkg 2008
20
SUCCESS OF ALM PROCESS
The ALM process rests on Three Pillars: 1. ALM Information Systems
2. ALM Organisation
3. ALM Process
ALM 2008
Com Bkg 2008
21
? Decision
Support and Reporting Tool ? Comparison between different Branches ? Product Analysis ? Duration Gap Analysis ? Risk Planning and Management ? Flexible Design ? Strategic Planning of the Asset-Liability Mix ? Simulation Analysis ? Transfer- Pricing Mechanism
ALM 2008
Com Bkg 2008
22
? Strong ? ALCO
Commitment of Senior Management should comprise the Senior Management
( including the CEO)
?A
Support Group of Operational Staff
ALM 2008
Com Bkg 2008
23
Board of Directors
Management Committee
Asset Liability Committee (ALCO)
Asset Liability Management Cell
Finance Planning Department
Credit Analysis Department
Credit Risk Management Department
Treasury
Investment and Loan Departments
ALM 2008
Com Bkg 2008
24
ALM 2008
Com Bkg 2008
25
ALM 2008
Com Bkg 2008
26
? The
scope of ALM function can be described as Risk Management of Market Risks
follows:
? Liquidity ? Management ? Trading ? Funding ? Profit
Risk Management and Capital Planning
Planning and Growth Projection
ALM 2008
Com Bkg 2008
27
Price Matching
(Rs. cr.)
*
Average cost/return on liabilities/assets.
Table 1 Table 1 (Rearranged)
Liabilities
Amount Rate (%) 15 25 30 0 5 12 10 20 50
Assets
Amount Rate (%) 0 12 15
Liabilities
Amount Rate (%) 10 5 15 0 0 5 10 5 15
Assets
Amount Rate (%) 0 12 12 Spread (%) 0 12 7
30
13
20
18
10
30 10 20
5
12 13 13 8.75*
ALM 2008
10
30 10 20 100
15
15 15 18 13.5*
10
3 2 5 4.75*
100
8.75*
100
13.5*
100
Com Bkg 2008
28
Table II
Maturity Matching Table II (Rearranged) (Rs. cr.)
(period in months)
Liabili ties Maturing within (months)
Assets Maturing within (months) 15 10 5 10 30 10 20 100 <1 3 6 12 24 36 >36
Liabil ities
Assets
Gap
Cumulati ve Gap
10 5 8 4 45 20 8 100
1 3 6 12 24 36 >36
10 5 8 4 45 20 8
ALM 2008
15 10 5 10 30 10 20
Com Bkg 2008
-5 -5 3 -6 15 10 -12
-5 -10 -7 -13 2 12 0
29
100
100
? Interest
Rate Risk: It is the risk of having a negative impact on a bank’s future earnings and on the market value of its equity due to changes in interest rates. ? Liquidity Risk: It is the risk of having insufficient liquid assets to meet the liabilities at a given time. ? Forex Risk: It is the risk of having losses in foreign exchange assets and liabilities due to exchanges in exchange rates among multicurrencies under consideration.
ALM 2008
Com Bkg 2008
30
? Availability
of funds as & when liabilities
are due ? Liquidity through maturity & cash flow matching ? Maturity ladder & calculation of cumulative surplus/deficits at selected dates
ALM 2008
Com Bkg 2008
31
Construction of time buckets: 1 to 30/31 days Over 1 month and upto 2 months Over 2 months 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
ALM 2008 Com Bkg 2008
32
? Main
focus on Short Term mismatches ? Mismatches during 1-30 days < 20 % of cash outflows in the same bucket ? For higher limits, special sanction from the Board ? Statement of Structural Liquidity (maturity ladder)
ALM 2008 Com Bkg 2008
33
?
?
?
1.
2. 3.
4.
Impact on Net Interest Income (NII) Long term impact on market value/ net worth Techniques: Gap Analysis Duration Gap Analysis Simulation Value at Risk
ALM 2008
Com Bkg 2008
34
? Calculating
Gap over different time intervals at a given date ? Mismatches between RSL and RSA ? ?GAP = RSA(? i) - RSL(? i) = NII(? i) for each time bucket ? Positive GAP ( RSA > RSL ) • Increasing Interest Rates would be beneficial for a Bank ? Negative GAP ( RSL > RSA ) • Falling Interest Rates would be beneficial for a Bank
ALM 2008 Com Bkg 2008
35
9. Control Framework 8. Regulatory Compliance Framework
7. Performance Measurement Framework
1.
Strategic Framework
2.
Organizational Framework
ASSET AND LIABILITY MANAGEMENT
4.
3.
Operational Framework
Analytical Framework
6. Information Reporting Framework
5. Technology Framework
ALM 2008 Com Bkg 2008
36
? ?
? ?
ALM Guidelines - February,1999 Operating Guidelines on Risk Management, October 7, 1999 covering broad contours for management of credit, liquidity, interest rate, foreign exchange and operational risks. December 2000 : Capital Adequacy Guidelines for Primary Dealers covering Credit and Market Risk On September 20, 2001, two Working Groups were constituted in Reserve Bank of India drawing experts from select banks and FIs for preparing detailed Guidance Notes on Credit Risk and Market Risk Management by banks.
ALM 2008
Com Bkg 2008
37
? Identified
further steps to be taken by banks for improving their existing risk management framework, suiting to Indian conditions
2005 – Detailed Capital Adequacy guidelines for Banks to move towards Basel II, 2007- final guidelines 2006 – April 17, the ALM framework of 1999 updated. 2007- Pillar II guidelines being issued
?
? ?
ALM 2008
Com Bkg 2008
38
? Issued
on Sept 05, 2007 ? Feb 10, 1999 guidelines covered Interest Rate and Liquidity Risk Management ? Cumulative mis-matches in first bucket to be reported in Statement of Structural Liquidity ? -ve Gap in 1-14 and 15-28 days buckets not to exceed 20 % of the cash flows ? Need for revising this position – Hence revised the first bucket to 1, 2-7 & 8-14 days
ALM 2008 Com Bkg 2008
39
? Cumulative
negative mismatches / Gap in new buckets – Next day, 2-7, 8-14 and 15-28 days not to exceed 5, 10, 15 and 20 % respectively of cash flow ? Format of Statement of Structural Liquidity has been revised accordingly ? Guidance instructions have been furnished ? Banks given time to fine-tune MIS by 1 Jan’08 ? Reporting frequency to continue as monthly ? Supervision is fortnightly from April 01,2008 ? Financing of gaps above norms to be indicated
ALM 2008
Com Bkg 2008
40
doc_153845221.ppt
This is a presentation explaining Banking Reforms, Liquidity Risk Profile of a bank, Managing Risks, Risk Management, GAP Analysis, ALM process, price matching, Interest Rate Risk
Asset Liability Management
? Geographical
spread of Bank branches ? Directed Investments / Credit Programs ? Administered Rates of Interest ? Accrual based accounting ? Problems of Recovery of Loans ? Deterioration in Quality of Assets /Loans ? Erosion of Profits ? No Computerisation ? Trade Union Issues
2
? L-P-G
Policy of GOI since 1991 (Liberalisation,privatisation,globalisation) ? Technological Changes – ATMs / Internet ? New Products and Services : Competition ? Narasimham Committee - I / II on Financial / Banking Sector Reforms (1991 & 1997) ? Capital Adequacy Ratio : IRAC Norms : NPAs ? Priority Sector Loans: Reduce from 40 to 10%? ? Reduce SLR (40%) and CRR (15%) ? Benchmark Prime Lending Rates ? Enactment / Amendments to various laws
ALM 2008
Com Bkg 2008
3
? Market
determined Rates of Interest ? No directed lending or investments ? Organisational Changes : Transparency ? 4 way classification of Loan Accounts / Assets ? Provisioning for Losses o/a NPAs & Std Assets ? ALM (1999) and Risk Management, KYC in Banks ? Non Performing Assets definition revised from 4 quarters (1993) dues in Principal & Interest to 3 (1994) to 2 (1995) quarters and now from April 01, 2004 – just 90 days / 1 quarter ! ? Basel II norms for Bank Supervision from 2008!
ALM 2008
Com Bkg 2008
4
Banks Economic Factors Economic Policies
Balance Sheet of a Bank Liabilities Capital Reserves and Surplus Deposits Borrowings Other Liabilities and Provisions Contingent Liabilities Assets Cash and Balances at RBI Balance with banks and money at call and short notice Investments Advances Fixed Assets Other Assets
ALM 2008 Com Bkg 2008
5
ALM 2008
Com Bkg 2008
6
ALM 2008
Com Bkg 2008
7
ALM 2008
Com Bkg 2008
8
? Various
Risks
• Interest Rate Risk • Foreign Exchange Risk • Liquidity Risk • Credit Risk
• Contingency Risk
ALM 2008
Com Bkg 2008
9
ALM 2008
Com Bkg 2008
10
? Till
the 1980s, a professional risk manager was unheard of ? Late 1980s, US Financial Firms started using VaR ? Bank for International Settlements : Basel I ;1988 ? Risk Metrics, 1995 ? Bank for International Settlement (BIS) - a series of risk management guidelines for Banks worldwide ? Market Risk Guidelines of Basel, 1996 ? Basel II process ( November 2005 Document)
ALM 2008 Com Bkg 2008
11
?
How to bring it (Risks) down to manageable levels?
•
The 5-step process
1. 2. 3. 4. 5. Identification of risks Quantification Policy formulation Strategy formulation Monitoring
ALM 2008
Com Bkg 2008
12
? An
attempt to match: Assets and Liabilities
?
In terms of:
Maturities and Interest Rates Sensitivities
?
To minimize: Interest Rate Risk and Liquidity Risk
ALM 2008
Com Bkg 2008
13
Asset Liability Management Asset Management How Liquid are the assets of the Bank
Liability Management How easily can the Bank generate loans from market
ALM 2008 Com Bkg 2008
14
? ALM
is an integral part of the financial management process of any bank. ? ALM is concerned with strategic balance sheet management involving risks caused by changes in the interest rates, exchange rates and the liquidity position of the bank. ? While managing these three risks forms the crux of ALM, credit risk and contingency risk also form a part of the ALM
ALM 2008
Com Bkg 2008
15
? ALM
can be termed as a risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities. ? It takes into consideration interest rates, earning power, and degree of willingness to take on debt and hence is also known as Surplus Management
ALM 2008 Com Bkg 2008
16
? ALM
is all about efficient management of balance sheet dynamics with regard to its size, constituents and quality. ? It is the process of managing the Net Interest Margin (NIM) within the overall risk bearing ability of a bank ? ALM process depends on the understanding of the balance sheet; the availability, accuracy, adequacy and expediency of the data and the MIS system
ALM 2008
Com Bkg 2008
17
? One
way to measure the direction and extent of asset-liability mismatch is by using gap analysis. The analysis derives its name from the “gap” which is the difference between the amounts of Rate Sensitive Asset (RSA) and Rate Sensitive Liabilities (RSL).
ALM 2008
Com Bkg 2008
18
? Mid
1970s in the U.S.A.
Deregulation of Interest Rates
Interest Rate Risk
Liquidity Risk
Credit Risk
ALM 2008 Com Bkg 2008
19
is defined as, “the process of decision – making to control risks of existence, stability and growth of a system through the dynamic balances of its assets and liabilities.” ? The text book definition of ALM is “a risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities. It takes into consideration interest rates, earning power and degree of willingness to take on debt. It is also called surplus- management”.
? ALM
ALM 2008 Com Bkg 2008
20
SUCCESS OF ALM PROCESS
The ALM process rests on Three Pillars: 1. ALM Information Systems
2. ALM Organisation
3. ALM Process
ALM 2008
Com Bkg 2008
21
? Decision
Support and Reporting Tool ? Comparison between different Branches ? Product Analysis ? Duration Gap Analysis ? Risk Planning and Management ? Flexible Design ? Strategic Planning of the Asset-Liability Mix ? Simulation Analysis ? Transfer- Pricing Mechanism
ALM 2008
Com Bkg 2008
22
? Strong ? ALCO
Commitment of Senior Management should comprise the Senior Management
( including the CEO)
?A
Support Group of Operational Staff
ALM 2008
Com Bkg 2008
23
Board of Directors
Management Committee
Asset Liability Committee (ALCO)
Asset Liability Management Cell
Finance Planning Department
Credit Analysis Department
Credit Risk Management Department
Treasury
Investment and Loan Departments
ALM 2008
Com Bkg 2008
24
ALM 2008
Com Bkg 2008
25
ALM 2008
Com Bkg 2008
26
? The
scope of ALM function can be described as Risk Management of Market Risks
follows:
? Liquidity ? Management ? Trading ? Funding ? Profit
Risk Management and Capital Planning
Planning and Growth Projection
ALM 2008
Com Bkg 2008
27
Price Matching
(Rs. cr.)
*
Average cost/return on liabilities/assets.
Table 1 Table 1 (Rearranged)
Liabilities
Amount Rate (%) 15 25 30 0 5 12 10 20 50
Assets
Amount Rate (%) 0 12 15
Liabilities
Amount Rate (%) 10 5 15 0 0 5 10 5 15
Assets
Amount Rate (%) 0 12 12 Spread (%) 0 12 7
30
13
20
18
10
30 10 20
5
12 13 13 8.75*
ALM 2008
10
30 10 20 100
15
15 15 18 13.5*
10
3 2 5 4.75*
100
8.75*
100
13.5*
100
Com Bkg 2008
28
Table II
Maturity Matching Table II (Rearranged) (Rs. cr.)
(period in months)
Liabili ties Maturing within (months)
Assets Maturing within (months) 15 10 5 10 30 10 20 100 <1 3 6 12 24 36 >36
Liabil ities
Assets
Gap
Cumulati ve Gap
10 5 8 4 45 20 8 100
1 3 6 12 24 36 >36
10 5 8 4 45 20 8
ALM 2008
15 10 5 10 30 10 20
Com Bkg 2008
-5 -5 3 -6 15 10 -12
-5 -10 -7 -13 2 12 0
29
100
100
? Interest
Rate Risk: It is the risk of having a negative impact on a bank’s future earnings and on the market value of its equity due to changes in interest rates. ? Liquidity Risk: It is the risk of having insufficient liquid assets to meet the liabilities at a given time. ? Forex Risk: It is the risk of having losses in foreign exchange assets and liabilities due to exchanges in exchange rates among multicurrencies under consideration.
ALM 2008
Com Bkg 2008
30
? Availability
of funds as & when liabilities
are due ? Liquidity through maturity & cash flow matching ? Maturity ladder & calculation of cumulative surplus/deficits at selected dates
ALM 2008
Com Bkg 2008
31
Construction of time buckets: 1 to 30/31 days Over 1 month and upto 2 months Over 2 months 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
ALM 2008 Com Bkg 2008
32
? Main
focus on Short Term mismatches ? Mismatches during 1-30 days < 20 % of cash outflows in the same bucket ? For higher limits, special sanction from the Board ? Statement of Structural Liquidity (maturity ladder)
ALM 2008 Com Bkg 2008
33
?
?
?
1.
2. 3.
4.
Impact on Net Interest Income (NII) Long term impact on market value/ net worth Techniques: Gap Analysis Duration Gap Analysis Simulation Value at Risk
ALM 2008
Com Bkg 2008
34
? Calculating
Gap over different time intervals at a given date ? Mismatches between RSL and RSA ? ?GAP = RSA(? i) - RSL(? i) = NII(? i) for each time bucket ? Positive GAP ( RSA > RSL ) • Increasing Interest Rates would be beneficial for a Bank ? Negative GAP ( RSL > RSA ) • Falling Interest Rates would be beneficial for a Bank
ALM 2008 Com Bkg 2008
35
9. Control Framework 8. Regulatory Compliance Framework
7. Performance Measurement Framework
1.
Strategic Framework
2.
Organizational Framework
ASSET AND LIABILITY MANAGEMENT
4.
3.
Operational Framework
Analytical Framework
6. Information Reporting Framework
5. Technology Framework
ALM 2008 Com Bkg 2008
36
? ?
? ?
ALM Guidelines - February,1999 Operating Guidelines on Risk Management, October 7, 1999 covering broad contours for management of credit, liquidity, interest rate, foreign exchange and operational risks. December 2000 : Capital Adequacy Guidelines for Primary Dealers covering Credit and Market Risk On September 20, 2001, two Working Groups were constituted in Reserve Bank of India drawing experts from select banks and FIs for preparing detailed Guidance Notes on Credit Risk and Market Risk Management by banks.
ALM 2008
Com Bkg 2008
37
? Identified
further steps to be taken by banks for improving their existing risk management framework, suiting to Indian conditions
2005 – Detailed Capital Adequacy guidelines for Banks to move towards Basel II, 2007- final guidelines 2006 – April 17, the ALM framework of 1999 updated. 2007- Pillar II guidelines being issued
?
? ?
ALM 2008
Com Bkg 2008
38
? Issued
on Sept 05, 2007 ? Feb 10, 1999 guidelines covered Interest Rate and Liquidity Risk Management ? Cumulative mis-matches in first bucket to be reported in Statement of Structural Liquidity ? -ve Gap in 1-14 and 15-28 days buckets not to exceed 20 % of the cash flows ? Need for revising this position – Hence revised the first bucket to 1, 2-7 & 8-14 days
ALM 2008 Com Bkg 2008
39
? Cumulative
negative mismatches / Gap in new buckets – Next day, 2-7, 8-14 and 15-28 days not to exceed 5, 10, 15 and 20 % respectively of cash flow ? Format of Statement of Structural Liquidity has been revised accordingly ? Guidance instructions have been furnished ? Banks given time to fine-tune MIS by 1 Jan’08 ? Reporting frequency to continue as monthly ? Supervision is fortnightly from April 01,2008 ? Financing of gaps above norms to be indicated
ALM 2008
Com Bkg 2008
40
doc_153845221.ppt