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Lecture 2: Asset and Liability management in banks - Coggle Diagram
Lecture 2: Asset and Liability management in banks
Introduction
The treasury business unit within a organization is typically responsible for the financial asset and liability risk management process
Functions of ALM
• Discuss economic and market conditions
• Measure and monitor performance
• Develop short-term and longer-term asset and liability
Component of a Bank Balance sheet
Asset
Cash & Balances with SBV
Bal. With Banks & Money at Call and Short Notices
Investments
Advances
Fixed Assets
Other Assets
Liabilities & equity
Capital
Reserve & Surplus
Deposits
Borrowings
Other Liabilities
ALM ( assets liability management )
Definition
a dynamic process of Planning, Organizing & Controlling of Assets Liabilities- their volumes, mixes, maturities, yields and costs in order to maintain liquidity and NII.
Significance of ALM
• Volatility
• Product Innovations & Complexities
• Regulatory Environment
• Management Recognition
Purpose & Objective of ALM
aims to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole so as to attain a predetermined acceptable risk/reward ratio
aims to stabilize short-term profits, long-term earnings and long-term substance of the bank
Liquidity Management
Bank’s liquidity management is the process of generating funds to meet contractual or relationship obligations at reasonable prices at all times
Type of liquidity risk
internal & external and other categories of liquidity risk such as funding risk, time risk, call risk.
Statement of interest rate sensitivity
Definition
generated by grouping RSA,RSL & OFF- Balance sheet items into various time buckets
RSA
• Money at call
• Advances
• Investment
RSL
• Deposits excluding Certificate of Deposits
• Borrowings
MATURITY GAP METHOD(IRS): THREE OPTIONS
• RSA>RSL= Positive Gap
• RSL>RSA= Negative Gap
• RSL=RSA= Zero Gap
Measurement of interest rate risk
Gap analysis
Duration analysis