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Submitted to:- Amruta Mam.

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M

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ALM is the process involving decision making about thecomposition of assets and liabilities including offbalance sheet items of the bank conducting the riskassessment.

Asset Liability Management is concerned withstrategic balance sheet management involving riskscaused by changes in interest rates, exchange rate,

credit risk and the liquidity position of bank. Withprofit becoming a key-factor.ALM is required to match assets & liabilities and

minimize liquidity as well as market risk.

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ALM is concerned with strategic managementof Balance Sheet by giving due weightage tomarket risks viz. Liquidity Risk, Interest Rate

Risk & Currency Risk.ALM function involves planning, directing,controlling the flow, level, mix, cost and yield offunds of the bank

ALM builds up Assets and Liabilities of thebank based on the concept of Net InterestIncome (NII) or Net Interest Margin (NIM).

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Purpose and objectives of asset liability

management

Review the interest rate structure and comparethe same to the interest/product pricing of

both assets and liabilities.Examine the loan and investment portfolios in

the light of

the foreign exchange risk and liquidity risk that

might arise.

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LIQUIDITY

MANAGEMENT

INTEREST RATERISKMANAGEMENT

Managementof ExchangeRate Risk

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Banks need liquidity to meet depositwithdrawal and to fund loan demands.

The variability of loan demands and

variability of deposits determine banksliquidity needs.It represents the ability toaccommodate decreases in liability and to

fund increases in assets.It demonstrates the market place that the

bank is safe and therefore capable ofrepaying its borrowings.

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Conti.... It enables bank to meet its prior loan

commitments, whether formal or informal. It enables bank to avoid the unprofitable sale of

assets.

It lowers the size of the default risk premiumthe bank must pay for funds.

Types of liquidity risk:A. Funding Risk

B. Time Risk

C. Call Risk.

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Objective of liquidity management

Ensure profitability

Ensure liquidity

Banks need liquidity to

Meet deposit withdrawal

Fund loan demands

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Interest rate risk is the volatility in net interestincome(NII) or in variations in net interest margin(NIM).

Gap:The gap is the difference between the amount ofassets and liabilities on which the interest rates arereset during a given period.

Basis risk:The risk that the interest rate of differentassets and liabilities may change in different magnitudes

is called basis risk.

Embedded option: Prepayment of loans and bondsand/or premature withdrawal of deposits before theirstated maturity dates.

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Conti....

Price Risk When Interest Rates Rise, the Market Value

of the Bond or Asset Falls

Reinvestment Risk When Interest Rates Fall, the Coupon

Payments on the Bond are Reinvested at LowerRates

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Foreign exchange Risk- Risk arising out ofadverse exchange rate movements during a period

in which it has open position in an individual foreigncurrency.

Transaction exposure- Change in the foreignexchange rate between the time the transaction is

executed and the time it is settled.Forwards- Agreement to buy or sell for apredetermined amount, at a predetermined rate on

a predetermined date.

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Conti....

Open position:The extent to which outstandingcontracts to purchase a currency exceedliabilities plus outstanding contracts to sell thecurrency & vice versa.

Overnight position- A limit on the maximumopen position left overnight, in all majorcurrencies.

Day-light position- A limit on maximum openposition in all major currencies at any point of time duringday. Such limits are generally larger than overnightpositions.

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ALM & BALANACE SHEET OF BANK

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Building an ALM policy-

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SUCCESS OF ALM IN BANKSPRE - CONDITIONS

Awareness for ALM in the Bank staff at all levelssupportive Management & dedicated Teams.

Method of reporting data from Branches/ otherDepartments. (Strong MIS).

Computerization - Full computerization, networking.

Insight into the banking operations, economic

forecasting, computerization, investment, credit.

Linking up ALM to future Risk ManagementStrategies.

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ALM is decreasing the market risk, operationalrisk, credit risk and other risk which are

affected the Banking System.

Outcomes-

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