Asset - Liability Management in Banks

Prepared by-
Sk. Nazibul Islam
Faculty member, BIBM
ALM: Conceptual Discussion
!day banks are "ig"ly c!mple# !rganizati!ns- !$$ering multiple ser%ices.
&i$$erent gr!ups !$ indi%iduals inside t"e bank usually make t"e decisi!ns
!n
- '"at cust!mers are t! recei%e l!ans
- '"at securities t"e bank s"!uld add t! its in%estment
p!rt$!li!
- '"at terms s"!uld be (u!ted t! t"e public !n dep!sits
and !t"er ser%ices t"e bank !$$ers
- '"at s!urces !$ capital t"e bank s"!uld dra) up!n
In a )ell- managed bank all !$ t"ese management decisi!ns must be
c!!rdinated acr!ss t"e )"!le bank.
It must be ensured t"at t"ey d! n!t clas" )it" eac" !t"er, leading t!
inc!nsistent acti!ns t"at damage t"e bank*s earnings and %alue.
!day bankers "a%e learned t! l!!k at t"eir asset and liability p!rt$!li!s as
an integrated )"!le, c!nsidering "!) t"e bank*s t!tal p!rt$!li! c!ntributes
t! its br!ad g!als !$ ade(uate pr!$itability and acceptable risk.
"is type !$ c!!rdinated and integrated bank decisi!n making is kn!)n as
asset-liability management.
ALM represents management !$ t"e structure !$ a bank balance s"eet in
suc" a )ay t"at interest related earnings are ma#imized )it" in t"e !%erall
risk pre$erences !$ a bank*s manager.
ALM-
Basically balance s"eet management
S!urces and +ses !$ Funds management
,!st and -e%enue implicati!n

.b/ecti%es !$ ALM
- Ma#imize pr!$itability
- Maintain ade(uate li(uidity
- Manage B0S -isk
ALM- Primary -esp!nsibility !$ reasury &epartment.
reasury analyzes B0S and places -esults 1 -ec!mmendati!ns t! AL,.
2Asset liability c!mmittee3
ALCO Composition
,"airman4 ,5.0M&
6 7ead !$ treasury
6 7ead !$ Finance
6 7ead !$ ,!rp!rate banking
6 7ead !$ ,!nsumer Banking
6 7ead !$ ,redit
6 7ead !$ .perati!n
AL,. meets !nce in e%ery m!nt" t! set and re%ie) ALM strategies.
AL,. Paper- ,!%erage
- ,!mmentary !n t"e last m!nt" status
- Interest -ate rend
- Balance S"eet0rend in A1L
- 8ey Management Indicat!rs
'"!lesale b!rr!)ing guidelines
,!mmitments t! cust!mers
L!an &ep!sit -ati!
Medium erm Funding -ati!
Ma#imum cumulati%e .ut$l!)
- Maturity Pr!$ile Mismatc"
- Interest -ate Pr!$ile
- L!cal -egulat!ry ,!mpliance etc.
A Bank Manager "as t"ree primary c!ncerns4
Liquidity Management: ! keep en!ug" cas" !n "and, t! ac(uire
su$$iciently li(uid assets t! pay t"e dep!sit!rs )"en t"ere are &ep!sit
.ut$l!)s.
Asset Management: ! minimize risks by ac(uiring assets t"at "a%e a l!)
rate !$ de$ault risk by di%ersi$ying asset "!ldings.
Strategies In%!l%ed4
- Searc" b!rr!)ers t! pay "ig" interest rates 0 yet unlikely t! de$ault.
- Purc"asing securities )it" "ig" returns and l!) risk.
-isk 9 -eturn rade !$$.
- Minimizing -isk by &i%ersi$ying b!t" "!ldings !$ L!ans and Securities.
N!t putting all eggs in !ne basket.
- Managing t"e Li(uidity !$ its assets s! t"at it can satis$y its reser%e
re(uirements )it"!ut bearing "uge c!sts.
Liability Management: "e main g!al !$ Liability Management is t!
ac(uire Funds at l!) c!st.
5arlier, a bank used t! take its liability as $i#ed and spent t"eir time trying t!
ac"ie%e an !ptimal mi# !$ assets. But t"e t"ings "a%e c"anged n!)-a-days.
A bank n!) can agree aggressi%ely set target $!r asset gr!)t" and try t!
ac(uire $unds as it needs.
"e "ig"er interest c!st !$ liabilities t!day "as signi$icantly a$$ected bank*s
pr!$itability and t"eir interest rate risk.
,!mp!siti!n !$ asset and liability !$ a bank
Balance S"eet
Asset Liability
,as" 1 Li(uid -eser%e
2N!n-5arning Asset3
L!ans0Ad%ances0In%est-ment
25arning Asset3
&ep!sit B!rr!)ing
2.utside liability3
,apital 2Inside liability3
&i$$erent Aspects !$ Fund Management !$ a Bank
Aspects .b/ecti%es
:..utside Liability Minimizati!n !$ ,!st 1 Stability !$
$und.
;.Inside liability -egulat!ry -e(uirement4 :<= !$
-'A !r k. ><< cr!re )"ic"e%er
is "ig"er.
?.N!n-5arning Asset -egulat!ry -e(uirement4 :@= !$
&L, A= ,-- and :?= SL-
>.5arning Asset Ma#imizati!n !$ -eturn and
Minimizati!n !$ -isk
B.Matc"ing Strategy Matc"ing bet)een Asset 1
Liability4 Interest -isk Matc"ing
and Maturity Matc"ing
A.Pricing !$ 5arning Asset Based !n Liability ,!st4 ,!st !$ $und,
risk premium
C.Pr!$itability Management Based !n ab!%e all.
Maturity Profile Mismatch
A key issue t"at banks need t! $!cus !n is t"e maturity !$ its assets and
liabilities in di$$erent ten!rs.
A typical strategy !$ a bank t! generate re%enue is t! run mismatc".
Banks make pr!$its t"r!ug" t"e pr!cess !$ asset trans$!rmati!n4 "ey
b!rr!) s"!rt term and lend l!nger term.
Mismatc" is acc!mpanied by li(uidity risk and e#cessi%e l!nger ten!r
lending against s"!rter-term b!rr!)ing )!uld put a bank*s balance s"eet in
a %ery critical and risky p!siti!n.
! address t"is risk and t! make sure a bank d!es n!t e#p!se itsel$ in
e#cessi%e mismatc", a bucket )ise maturity pr!$ile !$ t"e assets and
liabilities is prepared t! understand mismatc" in e%ery bucket.
Bucket- )ise means
Ne#t day
; 9 C days
C days 9 : m!nt"
: 9 ? m!nt"s
? 9 A m!nt"s
A m!nt"s 9 : year
: 9 ; year
; 9 ? years
? 9 > years
> 9 B years
.%er B year
Banks prepare F!recasted Balance S"eet )"ere t"e assets and liabilities
!$ t"e nature !$ current, !%erdra$t etc. are di%ided int! ,!re and N!n-,!re
balances.