Description
The report describes various types of risk involved in banking like credit risk, liquidity risk, sources of liquidity risk, types of liquidity risk, portfolio risk, interest rate risk, Forex Risk Management & Measures.
Management of Risks in Banking
Risk is a reality and part of life. Any business has to deal with risk even in the simplest transaction. Eg: A neighborhood “baniya” who gives groceries on credit to the local residents has to deal with the fact that a small percentage of his customers may not pay up all or do a part payment. Incase he stops supplying to the customers who pay partially, there is a chance that this customer may not pay at all ( which means that the baniya has now lost not only the outstanding portion pertaining to the previous supply but also the latest supplies thus causing a double jeopardy! Any bank confronts risks which are macro economic (eg: recession) or micro economic (eg: new competitive threats). Breakdown in technology, wrong assessment of a loan customer, natural disaster in an area where the bank operates are all examples of risk. Hence a bank needs procedures in place to assess, control and mitigate risks such that it is able to maintain a healthy balance sheet and pursue the objective of growth which is consistent and robust. The traditional business of a bank is financial intermediation i.e.: taking customer deposits and lending them. Lending helps banks mobilize the deposits (savings of the population) and channel them to sectors that are growing and need the funds for growth. The interest which is the cost that the borrower pays to the bank forms the core income for a traditional PSU bank. Foreign banks and private sector banks tend to be more aggressive in their approach and active in areas such as merchant banking, off balance sheet activities which are mainly focused in trading in sophisticated financial instruments which helps them to achieve profits without having to put more stress on traditional credit and the costs involve in administering and monitoring that credit (credit analysis, evaluation, sanction, monitoring, provisioning and regulatory compliance) Different Types of Risk: 1. Credit Risk: Is the risk that a loan /asset become “bad”. This can be an outright default (less common) or a gradual deterioration in the quality of an asset (more common). This hits the bank in many ways. a. The banks income (interest) gets hampered b. Costs associated with loan (follow-up recovery, documentation provisioning) on the other hand keep increasing. c. Perception about the bank deteriorates if the quality of “bad loans” is seen increasing. This impacts the market value of the bank’s shares. Credit Risk, forms the biggest component of any bank’s risk “pie”. Can be mitigated to some extent by the following:
a) Policy and Strategy: A sound credit policy which is proactive ensures that the bank is able to source loans in terms of the desired profile and at a cost that is feasible b) Organisational Structure: Having a structure of layers of hierarchy which ensures that loans are subject to a process of approval hierarchy and independence. In some banks the credit management is overseen by an independent credit committee which in turn reports to the Board of Directors. There are also sectoral limits that banks maintain to prevent concentration of risks to a particular sector of the economy c) Operations/ Systems: Delineating the credit marketing function from the approval process. Implementation of proactive risk management practices like industry s tudies, review of the company’s physical site and quarterly reviews within the credit committee to assess the results and future strategy. Periodic and independent reviews of credit limits sanctioned and company performance vis a vis industry benchmarks. A sound documentation sourcing process and maintenance is also key because the written word is what ultimately holds in the court of law in case of things going wrong
2. Liquidity Risk: This is the risk of insufficient liquidity for conducting normal banking operations. The risk that the bank will not be able to meet its liabilities when they fall due. Liquidity risk can occur when the bank does not have enough liquid assets that can be sold or when it is unable to raise money in the wholesale market or at the retail level. One of the main reasons that customers park their funds in banks is because of the confidence that they can withdraw the funds when needed. Inability by the bank to pay these funds on time can hamper the image and reputation of the bank and may cause a “run” on the bank. Sources of Liquidity Risk • • • • Depositors behavior Demand for credit Environment in the Financial Market Major developments - Domestic or international
Types of Liquidity risks ? Funding Risk Need to replace net outflows due to unanticipated withdrawal/non-renewal of deposits ? Time Risk Need to compensate for non-receipt of expected inflows of funds- NPAs ? Call Risk
Due to crystallization of contingent liabilities & needs of new business. Measurement of Liquidity: Stock approach - Employing ratios Volatile Liability Dependence Ratio Volatile Liabilities minus Temporary Investments to Earning Assets net of Temporary investments. Shows the extent to which bank’s reliance on volatile funds to support LT assets Growth in Core Deposits to growth in assets Higher the ratio the better Purchased Funds to Total Assets Loan Losses to Net Loans Cash flow approach: Preparing a statement of structural liquidity by taking into a/c b/s on particular date and place the various items of assets and liabilities in a maturity ladder according to time buckets Identify the liquidity needs - to evolve methods to meet it. Negative gaps in individual time buckets indicate the need. The need could be controlled by prudential limits as also by regulating the basis of business structure/financial flexibility of banks Regulatory Limit on outflows in first four time buckets. Prudential limits for managing liquidity Cap on inter-bank borrowings & Call money Outside funds vis-a-vis liquid assets Core Deposits vis-à-vis Core Assets Duration of liabilities and investment portfolio Need to monitor high value deposits Maximum Cumulative Outflows
Track Commitments given to corporate and banks to limit off-balance sheet exposure Monitor Swapped Funds Ratio- i.e., extent of Indian Rupees raised out of foreign currency sources. Maturity matching and a good ALM process (discussed subsequently) can help to predict the outflows and make arrangements for enough funds to be available. Too much liquidity can also cost the bank lower profits doe to poor deployment of funds. 3. Portfolio Risk: To put it simply, a portfolio is (or a cluster/basket) of homogenous loans. Eg 1: A Bank may have lent to ( or have exposure) to various sectors of the economy such as Housing Sector, Transport etc and it may happen that in a particular sector a portion of accounts may become delinquent due to various reasons. As happened in the US when the home mortgaged loan crisis occurred, at the root was the inability of household to make regular mortgage interest payments which was caused when the US economy went into recession. Eg 2: A bank having a high exposure to individual/ personal loans may experience high delinquencies in that category. However banks can’t stop lending to that category but have to have stringent lending policies to minimize the risk of many individuals defaulting thus leading to a good “portfolio” of personal loans. Portfolio risk is also exhibited by a decrease in the value of the overall portfolio. 4. Interest Rate Risk: Arises from interest rate mismatches in both the volume and maturity of interest sensitive assets, liabilities and off-balance sheet items. An unanticipated movement in the interest rates can seriously affect the profitability of the bank. The traditional focus of the ALM within a bank is the management of interest rate risk. Banks can lend either at fixed or variable rates. The variable rate is linked to some base rate. However they need to balance this because excess assets at a fixed rate (loans given at a lower rate) would mean that banks can’t take advantage of a rising interest rate scenario. On the other hand incase of excess fixed rate liabilities (eg: fixed deposits locked in at a fixed rate) then banks can get affected if the rates fall because now they are paying more for deposits that can be raised at a lower rate. The former situation will reduce the bank’s net interest income (diff between interest earned and paid). In the second situation, the decrease in rates will reduce the banks income because they are paying more on locked in funds that they are able to generate from such funds from the market. Measures of Interest Rate Risk: ? Maturity Gap Analysis – to measure interest rate sensitivity of earnings or NII
? ? ?
Duration Gap Analysis – to measure interest rate sensitivity of equity Simulation : Very sophisticated IT enabled tool that helps banks gauge impact of interest rate changes on their balance sheet Value at Risk :
Interest Rate Risk Management - Rising Interest Rate Scenario ? ? ? ? ? Reduce investment portfolio maturities Increase floating rate assets Increase short-term assets Increase long-term deposits/borrowings Sell fixed rate assets
Interest Rate Risk Management - Falling Interest Rate Scenario ? ? ? ? Increase maturities of investment portfolio Increase fixed rate loans Increase short-term deposits/borrowings (reduce maturity of liabilities) Increase floating rate deposits
5. Price Risk: Banks incur market or price risk on instruments traded in a well-defined markets. The value of any instrument is a function of many factors: a. Price b. Coupon c. Frequency of coupon d. Time e. Interest f. Alternatives available in the market
If a bank has a portfolio of various instruments (bonds) it is exposed to the risk that the price of the instrument may be volatile. Typically the price of a bond falls when the interest rate rises. Eg: The banks trading books may contain instruments that need to be marked to market.
Eg: There is an Rs 1000 denomination 5 year tenor bond with a coupon rate of 8% coupon to be paid annually. Suppose today the bond is being sold at Rs 1000...the investor in this bond will get yearly coupon (interest) of Rs 80 for a period of 5 years plus the Principal amount at the end of 5 years. Total coupon to be received is Rs 400.If this bond becomes tradable in the market, the price of the bond becomes a function of the rate of interest. Suppose this bond becomes tradable in the market and the interest rate increases to 9%. Now an investor who invests Rs 1000 will get a higher coupon on the investment as the interest rates have gone up. In other words, now an investor will have to invest an amount lesser than Rs 1000 to derive the same benefit as would have received from the Rs 1000 bond @8% with a 5 year tenor. Therefore the Rs 1000 bond (5 yr) 2 85 will be available in the market for an amount lesser than Rs 1000.Thus the price of the bond goes down when the interest rate goes up as the price of a bond is inversely proportional to the interest rate (yield). This is just one example, a bank will have numerous such instruments and combinations thereof which will have to be factored into consideration while reviewing the price risk. 6. Foreign Exchange Risk: In the dynamic forex scenario, any currency net short or long position can expose a bank to a forex risk. Currency risk may arise on account of transactions undertaken on behalf of the bank or its customers. Successful mismatch judgments and analysis of maturities may reflect successful risk management techniques. Banks are also exposed to interest rate risk, which arises from the maturity mismatching of foreign currency positions. Managing Foreign Exchange Risk ? Open position limits Daylight limit and the Overnight limit. ? The daylight limit is substantially higher for two reasons, (a) It is easier to manage exchange risk when the market is open and the bank is actively present in the market and (b) The bank needs a higher limit to accommodate client flows during business hours. Overnight position, being subject to more uncertainty and therefore being more risky should be much. Risk inherent to running open foreign Exchange positions. ? ? Banks are also exposed to interest rate risk arising from maturity mismatching of foreign currency positions. Banks also face the risk of default of the counter-parties or settlement risk.
?
Forex transactions with counter-parties from another country also trigger sovereign or country risk. Forex Risk Management & Measures
? ? ?
Setting up appropriate limits- open position and gaps. Clear-cut and well-defined division of responsibility between front, middle and back offices. VaR approach to measure risk associated with exposures should also be adopted.
Tools and Techniques for managing forex risk ? ? Hedging forex risk by derivatives like forwards, futures, options. Measurement of forex VaR.
7. Gearing or Leverage Risk: Banks attract deposits because they are considered a safe alternative; however banks have to ensure that they are not over geared. Hence for banks the gearing limits are more stringent than other businesses. 8. Sovereign and Political Risk: Political Risk is the risk that the political entities of the country will interfere in the operations of banks through policies or regulations .Sovereign Risk is the risk that the government will default on its obligations to the banks or place some embargo on the operations of bank operations. a. Eg: During the Gulf War a lot of NRI’s staying and working in Kuwait were unable to get access to their bank accounts or funds thus causing them severe financial hardship. 9. Operating Risk: Is the risk of doing and remaining in the business of banking. Is associated with losses arising from fraud or litigation. a. Eg: The London borough of Hammersmith and Fulham had invested public money in taking out interest rate swaps between Dec 1983 to Feb 1989.They had bought the swaps for speculation and hedging. The speculation went awry and the tax payers went to court. The government declared the swap contracts void. The banks in question: Midland, Barclays, Chemical etc were left with GBP 400 million in losses and 15 million in legal fees. Organization Structure: Focus on Risk: Organizations usually have departments or units that cover the entire functions of a bank. Typical units/committees are: a) Mid Office: Is the intermediary department in the treasury department of a bank. It acts as a watchdog to ensure that the front office (dealing room) and the back office are not in breach of any limits (internal or regulatory) with respect to open positions, rates, individual limits assigned to traders etc.
b) ALM Support Group: Performs interface and communication function between treasury and the Balance Sheet Management Group. This unit focuses on the maturities of various assets and liabilities. The idea is to proactively manage both the sides of a bank’s balance sheet. With a special emphasis, on the management of interest rate and liquidity risk. Traditional focus has been on “on balance” sheet items. However with bank spreads narrowing due to reasons like stiff competition and the pressure for showing robust profits, has led to a growth in the popularity and usage of sophisticated treasury products such as hybrid derivatives has increased the role that the ALM has to play in bank business monitoring. c) ALCO (Asset Liability Management Committee): Plays the part of strategy making wrt the rates that the bank wants to quote on various deposit and liability products. Their actions result in the bank assuming a certain profile within liabilities and deposits. d) Risk Management Committee: Apex level committee usually chaired by a very senior bank office bearer like the CMD or equivalent and having representation of the Board. Answerable to the Board / RBI incase of any queries and responsible to overseeing that the intra organizational policies wrt risk management are followed and implemented.
doc_308772698.pdf
The report describes various types of risk involved in banking like credit risk, liquidity risk, sources of liquidity risk, types of liquidity risk, portfolio risk, interest rate risk, Forex Risk Management & Measures.
Management of Risks in Banking
Risk is a reality and part of life. Any business has to deal with risk even in the simplest transaction. Eg: A neighborhood “baniya” who gives groceries on credit to the local residents has to deal with the fact that a small percentage of his customers may not pay up all or do a part payment. Incase he stops supplying to the customers who pay partially, there is a chance that this customer may not pay at all ( which means that the baniya has now lost not only the outstanding portion pertaining to the previous supply but also the latest supplies thus causing a double jeopardy! Any bank confronts risks which are macro economic (eg: recession) or micro economic (eg: new competitive threats). Breakdown in technology, wrong assessment of a loan customer, natural disaster in an area where the bank operates are all examples of risk. Hence a bank needs procedures in place to assess, control and mitigate risks such that it is able to maintain a healthy balance sheet and pursue the objective of growth which is consistent and robust. The traditional business of a bank is financial intermediation i.e.: taking customer deposits and lending them. Lending helps banks mobilize the deposits (savings of the population) and channel them to sectors that are growing and need the funds for growth. The interest which is the cost that the borrower pays to the bank forms the core income for a traditional PSU bank. Foreign banks and private sector banks tend to be more aggressive in their approach and active in areas such as merchant banking, off balance sheet activities which are mainly focused in trading in sophisticated financial instruments which helps them to achieve profits without having to put more stress on traditional credit and the costs involve in administering and monitoring that credit (credit analysis, evaluation, sanction, monitoring, provisioning and regulatory compliance) Different Types of Risk: 1. Credit Risk: Is the risk that a loan /asset become “bad”. This can be an outright default (less common) or a gradual deterioration in the quality of an asset (more common). This hits the bank in many ways. a. The banks income (interest) gets hampered b. Costs associated with loan (follow-up recovery, documentation provisioning) on the other hand keep increasing. c. Perception about the bank deteriorates if the quality of “bad loans” is seen increasing. This impacts the market value of the bank’s shares. Credit Risk, forms the biggest component of any bank’s risk “pie”. Can be mitigated to some extent by the following:
a) Policy and Strategy: A sound credit policy which is proactive ensures that the bank is able to source loans in terms of the desired profile and at a cost that is feasible b) Organisational Structure: Having a structure of layers of hierarchy which ensures that loans are subject to a process of approval hierarchy and independence. In some banks the credit management is overseen by an independent credit committee which in turn reports to the Board of Directors. There are also sectoral limits that banks maintain to prevent concentration of risks to a particular sector of the economy c) Operations/ Systems: Delineating the credit marketing function from the approval process. Implementation of proactive risk management practices like industry s tudies, review of the company’s physical site and quarterly reviews within the credit committee to assess the results and future strategy. Periodic and independent reviews of credit limits sanctioned and company performance vis a vis industry benchmarks. A sound documentation sourcing process and maintenance is also key because the written word is what ultimately holds in the court of law in case of things going wrong
2. Liquidity Risk: This is the risk of insufficient liquidity for conducting normal banking operations. The risk that the bank will not be able to meet its liabilities when they fall due. Liquidity risk can occur when the bank does not have enough liquid assets that can be sold or when it is unable to raise money in the wholesale market or at the retail level. One of the main reasons that customers park their funds in banks is because of the confidence that they can withdraw the funds when needed. Inability by the bank to pay these funds on time can hamper the image and reputation of the bank and may cause a “run” on the bank. Sources of Liquidity Risk • • • • Depositors behavior Demand for credit Environment in the Financial Market Major developments - Domestic or international
Types of Liquidity risks ? Funding Risk Need to replace net outflows due to unanticipated withdrawal/non-renewal of deposits ? Time Risk Need to compensate for non-receipt of expected inflows of funds- NPAs ? Call Risk
Due to crystallization of contingent liabilities & needs of new business. Measurement of Liquidity: Stock approach - Employing ratios Volatile Liability Dependence Ratio Volatile Liabilities minus Temporary Investments to Earning Assets net of Temporary investments. Shows the extent to which bank’s reliance on volatile funds to support LT assets Growth in Core Deposits to growth in assets Higher the ratio the better Purchased Funds to Total Assets Loan Losses to Net Loans Cash flow approach: Preparing a statement of structural liquidity by taking into a/c b/s on particular date and place the various items of assets and liabilities in a maturity ladder according to time buckets Identify the liquidity needs - to evolve methods to meet it. Negative gaps in individual time buckets indicate the need. The need could be controlled by prudential limits as also by regulating the basis of business structure/financial flexibility of banks Regulatory Limit on outflows in first four time buckets. Prudential limits for managing liquidity Cap on inter-bank borrowings & Call money Outside funds vis-a-vis liquid assets Core Deposits vis-à-vis Core Assets Duration of liabilities and investment portfolio Need to monitor high value deposits Maximum Cumulative Outflows
Track Commitments given to corporate and banks to limit off-balance sheet exposure Monitor Swapped Funds Ratio- i.e., extent of Indian Rupees raised out of foreign currency sources. Maturity matching and a good ALM process (discussed subsequently) can help to predict the outflows and make arrangements for enough funds to be available. Too much liquidity can also cost the bank lower profits doe to poor deployment of funds. 3. Portfolio Risk: To put it simply, a portfolio is (or a cluster/basket) of homogenous loans. Eg 1: A Bank may have lent to ( or have exposure) to various sectors of the economy such as Housing Sector, Transport etc and it may happen that in a particular sector a portion of accounts may become delinquent due to various reasons. As happened in the US when the home mortgaged loan crisis occurred, at the root was the inability of household to make regular mortgage interest payments which was caused when the US economy went into recession. Eg 2: A bank having a high exposure to individual/ personal loans may experience high delinquencies in that category. However banks can’t stop lending to that category but have to have stringent lending policies to minimize the risk of many individuals defaulting thus leading to a good “portfolio” of personal loans. Portfolio risk is also exhibited by a decrease in the value of the overall portfolio. 4. Interest Rate Risk: Arises from interest rate mismatches in both the volume and maturity of interest sensitive assets, liabilities and off-balance sheet items. An unanticipated movement in the interest rates can seriously affect the profitability of the bank. The traditional focus of the ALM within a bank is the management of interest rate risk. Banks can lend either at fixed or variable rates. The variable rate is linked to some base rate. However they need to balance this because excess assets at a fixed rate (loans given at a lower rate) would mean that banks can’t take advantage of a rising interest rate scenario. On the other hand incase of excess fixed rate liabilities (eg: fixed deposits locked in at a fixed rate) then banks can get affected if the rates fall because now they are paying more for deposits that can be raised at a lower rate. The former situation will reduce the bank’s net interest income (diff between interest earned and paid). In the second situation, the decrease in rates will reduce the banks income because they are paying more on locked in funds that they are able to generate from such funds from the market. Measures of Interest Rate Risk: ? Maturity Gap Analysis – to measure interest rate sensitivity of earnings or NII
? ? ?
Duration Gap Analysis – to measure interest rate sensitivity of equity Simulation : Very sophisticated IT enabled tool that helps banks gauge impact of interest rate changes on their balance sheet Value at Risk :
Interest Rate Risk Management - Rising Interest Rate Scenario ? ? ? ? ? Reduce investment portfolio maturities Increase floating rate assets Increase short-term assets Increase long-term deposits/borrowings Sell fixed rate assets
Interest Rate Risk Management - Falling Interest Rate Scenario ? ? ? ? Increase maturities of investment portfolio Increase fixed rate loans Increase short-term deposits/borrowings (reduce maturity of liabilities) Increase floating rate deposits
5. Price Risk: Banks incur market or price risk on instruments traded in a well-defined markets. The value of any instrument is a function of many factors: a. Price b. Coupon c. Frequency of coupon d. Time e. Interest f. Alternatives available in the market
If a bank has a portfolio of various instruments (bonds) it is exposed to the risk that the price of the instrument may be volatile. Typically the price of a bond falls when the interest rate rises. Eg: The banks trading books may contain instruments that need to be marked to market.
Eg: There is an Rs 1000 denomination 5 year tenor bond with a coupon rate of 8% coupon to be paid annually. Suppose today the bond is being sold at Rs 1000...the investor in this bond will get yearly coupon (interest) of Rs 80 for a period of 5 years plus the Principal amount at the end of 5 years. Total coupon to be received is Rs 400.If this bond becomes tradable in the market, the price of the bond becomes a function of the rate of interest. Suppose this bond becomes tradable in the market and the interest rate increases to 9%. Now an investor who invests Rs 1000 will get a higher coupon on the investment as the interest rates have gone up. In other words, now an investor will have to invest an amount lesser than Rs 1000 to derive the same benefit as would have received from the Rs 1000 bond @8% with a 5 year tenor. Therefore the Rs 1000 bond (5 yr) 2 85 will be available in the market for an amount lesser than Rs 1000.Thus the price of the bond goes down when the interest rate goes up as the price of a bond is inversely proportional to the interest rate (yield). This is just one example, a bank will have numerous such instruments and combinations thereof which will have to be factored into consideration while reviewing the price risk. 6. Foreign Exchange Risk: In the dynamic forex scenario, any currency net short or long position can expose a bank to a forex risk. Currency risk may arise on account of transactions undertaken on behalf of the bank or its customers. Successful mismatch judgments and analysis of maturities may reflect successful risk management techniques. Banks are also exposed to interest rate risk, which arises from the maturity mismatching of foreign currency positions. Managing Foreign Exchange Risk ? Open position limits Daylight limit and the Overnight limit. ? The daylight limit is substantially higher for two reasons, (a) It is easier to manage exchange risk when the market is open and the bank is actively present in the market and (b) The bank needs a higher limit to accommodate client flows during business hours. Overnight position, being subject to more uncertainty and therefore being more risky should be much. Risk inherent to running open foreign Exchange positions. ? ? Banks are also exposed to interest rate risk arising from maturity mismatching of foreign currency positions. Banks also face the risk of default of the counter-parties or settlement risk.
?
Forex transactions with counter-parties from another country also trigger sovereign or country risk. Forex Risk Management & Measures
? ? ?
Setting up appropriate limits- open position and gaps. Clear-cut and well-defined division of responsibility between front, middle and back offices. VaR approach to measure risk associated with exposures should also be adopted.
Tools and Techniques for managing forex risk ? ? Hedging forex risk by derivatives like forwards, futures, options. Measurement of forex VaR.
7. Gearing or Leverage Risk: Banks attract deposits because they are considered a safe alternative; however banks have to ensure that they are not over geared. Hence for banks the gearing limits are more stringent than other businesses. 8. Sovereign and Political Risk: Political Risk is the risk that the political entities of the country will interfere in the operations of banks through policies or regulations .Sovereign Risk is the risk that the government will default on its obligations to the banks or place some embargo on the operations of bank operations. a. Eg: During the Gulf War a lot of NRI’s staying and working in Kuwait were unable to get access to their bank accounts or funds thus causing them severe financial hardship. 9. Operating Risk: Is the risk of doing and remaining in the business of banking. Is associated with losses arising from fraud or litigation. a. Eg: The London borough of Hammersmith and Fulham had invested public money in taking out interest rate swaps between Dec 1983 to Feb 1989.They had bought the swaps for speculation and hedging. The speculation went awry and the tax payers went to court. The government declared the swap contracts void. The banks in question: Midland, Barclays, Chemical etc were left with GBP 400 million in losses and 15 million in legal fees. Organization Structure: Focus on Risk: Organizations usually have departments or units that cover the entire functions of a bank. Typical units/committees are: a) Mid Office: Is the intermediary department in the treasury department of a bank. It acts as a watchdog to ensure that the front office (dealing room) and the back office are not in breach of any limits (internal or regulatory) with respect to open positions, rates, individual limits assigned to traders etc.
b) ALM Support Group: Performs interface and communication function between treasury and the Balance Sheet Management Group. This unit focuses on the maturities of various assets and liabilities. The idea is to proactively manage both the sides of a bank’s balance sheet. With a special emphasis, on the management of interest rate and liquidity risk. Traditional focus has been on “on balance” sheet items. However with bank spreads narrowing due to reasons like stiff competition and the pressure for showing robust profits, has led to a growth in the popularity and usage of sophisticated treasury products such as hybrid derivatives has increased the role that the ALM has to play in bank business monitoring. c) ALCO (Asset Liability Management Committee): Plays the part of strategy making wrt the rates that the bank wants to quote on various deposit and liability products. Their actions result in the bank assuming a certain profile within liabilities and deposits. d) Risk Management Committee: Apex level committee usually chaired by a very senior bank office bearer like the CMD or equivalent and having representation of the Board. Answerable to the Board / RBI incase of any queries and responsible to overseeing that the intra organizational policies wrt risk management are followed and implemented.
doc_308772698.pdf