alm maturity profile
Post on 10-Feb-2018
216 Views
Preview:
TRANSCRIPT
-
7/22/2019 ALM Maturity Profile
1/16
Asset - Liability Management in Banks
Prepared by-
Sk. Nazibul Islam
Faculty member, BIBM
-
7/22/2019 ALM Maturity Profile
2/16
ALM: Conceptual Discussion
Today banks are highly complex organizations- offeringmultiple services.
Different groups of individuals inside the bank usually make
the decisions on- What customers are to receive loans
- What securities the bank should add to its investment
portfolio
- What terms should be quoted to the public on deposits
and other services the bank offers- What sources of capital the bank should draw upon
-
7/22/2019 ALM Maturity Profile
3/16
In a well- managed bank all of these management
decisions must be coordinated across the whole bank.
It must be ensured that they do not clash with each
other, leading to inconsistent actions that damage the
banks earnings and value.
Today bankers have learned to look at their asset and
liability portfolios as an integrated whole, considering how
the banks total portfolio contributes to its broad goals of
adequate profitability and acceptable risk.
This type of coordinated and integrated bank decision
making is known as asset-liability management.
-
7/22/2019 ALM Maturity Profile
4/16
ALM represents management of the structure of abank balance sheet in such a way that interest
related earnings are maximized with in the overall
risk preferences of a banks manager.
ALM-
Basically balance sheet management
Sources and Uses of Funds management
Cost and Revenue implication
-
7/22/2019 ALM Maturity Profile
5/16
Objectives of ALM
- Maximize profitability
- Maintain adequate liquidity
- Manage B/S Risk
ALM- Primary Responsibility of Treasury
Department.
Treasury analyzes B/S and places Results &
Recommendations to ALCO (Asset liabilitycommittee)
-
7/22/2019 ALM Maturity Profile
6/16
ALCO Composition
Chairman: CEO/MD+ Head of treasury
+ Head of Finance
+ Head of Corporate banking
+ Head of Consumer Banking+ Head of Credit
+ Head of Operation
ALCO meets once in every month to set and
review ALM strategies.
-
7/22/2019 ALM Maturity Profile
7/16
ALCO Paper- Coverage
- Commentary on the last month status
- Interest Rate Trend- Balance Sheet/Trend in A&L
- Key Management Indicators
Wholesale borrowing guidelines
Commitments to customersLoan Deposit Ratio
Medium Term Funding Ratio
Maximum cumulative Outflow
- Maturity Profile Mismatch
- Interest Rate Profile
- Local Regulatory Compliance etc.
-
7/22/2019 ALM Maturity Profile
8/16
A Bank Manager has three primary concerns:
Liqu id i ty Management:To keep enough cash on hand, to acquire
sufficiently liquid assets to pay the depositors when there are DepositOutflows.
Asset Management: To minimize risks by acquiring assets that have a
low rate of default risk by diversifying asset holdings.
Strategies Involved:
- Search borrowers to pay high interest rates / yet unlikely to default.
- Purchasing securities with high returns and low risk.
RiskReturn Trade off.
- Minimizing Risk by Diversifying both holdings of Loans and Securities.
Not putting all eggs in one basket.
- Managing the Liquidity of its assets so that it can satisfy its reserve
requirements without bearing huge costs.
-
7/22/2019 ALM Maturity Profile
9/16
Liabi l i ty Management: The main goal of Liability
Management is to acquire Funds at low cost.
Earlier, a bank used to take its liability as fixed and spent
their time trying to achieve an optimal mix of assets. But the
things have changed now-a-days. A bank now can agreeaggressively set target for asset growth and try to acquire
funds as it needs.
The higher interest cost of liabilities today has significantlyaffected banks profitability and their interest rate risk.
-
7/22/2019 ALM Maturity Profile
10/16
Composition of asset and liability of a bank
Balance Sheet
Asset Liability
Cash & Liquid Reserve
(Non-Earning Asset)
Loans/Advances/Invest-
ment
(Earning Asset)
Deposit Borrowing
(Outside liability)
Capital (Inside liability)
-
7/22/2019 ALM Maturity Profile
11/16
Different Aspects of Fund Management of a Bank
Aspects Objectives1.Outside Liability Minimization of Cost & Stability offund.
2.Inside liability Regulatory Requirement: 10% of
RWA or Tk. 400 crore
whichever is higher.
3.Non-Earning Asset Regulatory Requirement: 19% of
TDTL, 6% CRR and 13% SLR
4.Earning Asset Maximization of Return and
Minimization of Risk
5.Matching Strategy Matching between Asset &
Liability: Interest Risk Matchingand Maturity Matching
6.Pricing of Earning Asset Based on Liability Cost: Cost of fund,
risk premium
7.Profitability Management Based on above all.
-
7/22/2019 ALM Maturity Profile
12/16
Maturity Profile Mismatch
A key issue that banks need to focus on is the
maturity of its assets and liabilities in different
tenors.
A typical strategy of a bank to generaterevenue is to run mismatch.
Banks make profits through the process ofasset transformation: They borrow short term
and lend longer term.
-
7/22/2019 ALM Maturity Profile
13/16
Mismatch is accompanied by liquidity risk andexcessive longer tenor lending against shorter-
term borrowing would put a banks balance sheet
in a very critical and risky position.
To address this risk and to make sure a bank does
not expose itself in excessive mismatch, a bucket
wise maturity profile of the assets and liabilities is
prepared to understand mismatch in every bucket.
-
7/22/2019 ALM Maturity Profile
14/16
Bucket- wise means
Next day
27 days7 days1 month
13 months
36 months
6 months1 year12 year
23 years
34 years
45 years
Over 5 year
-
7/22/2019 ALM Maturity Profile
15/16
Banks prepare Forecasted Balance Sheet where the
assets and liabilities of the nature of current, overdraft etc.
are divided into Core and Non-Core balances.
Core Non-Core
Stable and will stay withthe bank
Less stable
Can be put into over 1
year bucket
Can be put in 27 days
or 3 months bucket.
-
7/22/2019 ALM Maturity Profile
16/16
top related