Beruflich Dokumente
Kultur Dokumente
Submitted to:
Dr. J K Chandel
Submitted by:
Nisha Aneja
Roll No. 49
MBA-5 Year (10th
Sem)
CONTENTS
DEFINITION
EVOLUTION
In the 1940s and the 1950s, there was an abundance of funds in banks
in the form of demand and savings deposits. Hence, the focus then
was mainly on asset management
In the 1980s, volatility of interest rates in USA and Europe caused the
focus to broaden to include the issue of interest rate risk. ALM began
to extend beyond the bank treasury to cover the loan and deposit
functions
SIGNIFICANCE OF ALM
Volatility
Regulatory Environment
Management Recognition
Assets
1.
2.
3.
4.
5.
Capital
Reserve & Surplus
Deposits
Borrowings
Other Liabilities
ALM Organization
ALM Process
ABC Approach :
analysing the behaviour of asset and liability products in the
top branches as they account for significant business
then making rational assumptions about the way in which
assets and liabilities would behave in other branches
The data and assumptions can then be refined over time as the
bank management gain experience
The spread of computerisation will also help banks in
accessing data.
ALM ORGANIZATION
The board should have overall responsibilities and should set the limit for liquidity, interest rate,
foreign exchange and equity price risk
Is responsible for balance sheet planning from risk - return perspective including the strategic
management of interest rate and liquidity risks
The role of ALCO includes product pricing for both deposits and advances, desired maturity
profile of the incremental assets and liabilities,
It will have to develop a view on future direction of interest rate movements and decide on a
funding mix between fixed vs floating rate funds, wholesale vs retail deposits, money market vs
capital market funding, domestic vs foreign currency funding
It should review the results of and progress in implementation of the decisions made in the
previous meetings
ALM PROCESS
Risk Parameters
Risk Identification
Risk Measurement
Risk Management
Risk Policies and
Tolerance Level
CATEGORIES OF RISK
Credit Risk
Market Risk
Operational Risk
Commodity risk
Process risk
Portfolio risk
/Concentration risk
Infrastructure risk
Settlement risk
Model risk
Human risk
Liquidity risk
Liquidity Risk
Currency Risk
Interest Rate Risk
LIQUIDITY RISK
Liquidity risk arises from funding of long term assets
by short term liabilities, thus making the liabilities
subject
Funding
risk
to refinancing.
Time risk
Call Risk
i.
1 to 14 days
ii.
15 to 28 days
iii.
iv.
v.
vi.
vii.
viii.
Over 5 years
Places all cash inflows and outflows in the maturity ladder as per
residual maturity
Banks can fix higher tolerance level for other maturity buckets.
CURRENCY RISK
Options
Interest
Rate
Risk
Yield
Repricing
Basis Risk: The assets could be based on LIBOR rates whereas the
liabilities could be based on Treasury rates or a Swap market rate.
Yield Curve Risk: The changes are not always parallel but it could
be a twist around a particular tenor and thereby affecting different
maturities differently.
THREE OPTIONS:
A) Rate Sensitive Assets>Rate Sensitive Liabilities= Positive Gap
B) Rate Sensitive Assets<Rate Sensitive Liabilities = Negative Gap
C) Rate Sensitive Assets=Rate Sensitive Liabilities = Zero Gap
The basic weakness with this model is that this method takes into
account only the book value of assets and liabilities and hence
ignores their market value.
Duration Analysis
It basically refers to the average life of the asset or the liability. It
is the weighted average time to maturity of all the preset values of
cash flows
The larger the value of the duration, the more sensitive is the price
of that asset or liability to changes in interest rates.
SIMULATION
BASEL I NORMS
Total Capital
( at least 8% of total risk-weighted assets)
Tier 1 Capital
Tier 2 Capital
Loan-loss
reserves
subordinated
debt.
PURPOSE OF BASEL 1
1.
2.
Achievement :
To set up a minimum risk-based capital adequacy
applying to all banks and governments in the world
RISK CATEGORIZATION
According to Basel I, the total capital should represent at
least 8% of the banks credit risk.
Risks can be:
The on-balance sheet risk (like risks associated with cash
& gold held with bank, government bonds, corporate
bonds etc.)
Market risk including interest rates, foreign exchange,
equity derivatives & commodities.
Non Trading off-balance sheet risks like forward
purchase of assets or transaction related debt assets
BASEL II NORMS
Basel II norms are based on 3 pillars:
Minimum Capital Banks must hold capital against 8% of their assets, after
adjusting their assets for risk
Supervisory Review It is the process whereby national regulators ensure their
home country banks are following the rules.
Market Discipline It is based on enhanced disclosure of risk
Risk Categorization
In the Basel II accord, Credit Risk, Market Risk and Operational Risks were
recognized.
Under Basel II, Credit Risk has three approaches namely, standardized,
foundation internal ratings- based (IRB), and advanced IRB.
Operational Risk has measurement approaches like the Basic Indicator approach,
Standardized approach and the Advanced Measurement approach.
THANK YOU