Download - MOCB Finalest
-
7/30/2019 MOCB Finalest
1/52
Reshma Soni (201127) Rohit Bhartiya (201133) Samridhi Madan ( 201142)
Abhishek Kumar (053060)
Presentation on Treasury, Investment and Risk Managementin banks
-
7/30/2019 MOCB Finalest
2/52
Introduction
-
7/30/2019 MOCB Finalest
3/52
What are the Functions of Banks?
-
7/30/2019 MOCB Finalest
4/52
Banking involves
ProprietaryServices
Direct Exposure
Risk on theirown Behalf)
Consumerservices
TradingOperation
Bankingoperations
-
7/30/2019 MOCB Finalest
5/52
Among Primary Functions of
Bank(Lending)
Most loans are ILLIQUID
Riskiest Business Assets
Weakens the quality of earning capacity
-
7/30/2019 MOCB Finalest
6/52
Another Major Categories of EarningAssets
Government Bonds
& Notes
Corporate Bonds
& Notes
Other forms of Debtsecurities(CDs, CPs)
Stocks Permitted byLaw(
Investmentsin Securities
-
7/30/2019 MOCB Finalest
7/52
What are the functions of bank security portfolio?
-
7/30/2019 MOCB Finalest
8/52
Stabilize the banksincome
Makes banksbalance sheet lookfinancially stronger
Provide geographic
diversification
Back up source of liquidity
Help hedge bank againstlosses due to interest
rates
Offset Credit riskexposure in the banks
loan portfolio Functions of
BankSecurityPortfolio
-
7/30/2019 MOCB Finalest
9/52
Investment stands betweencash, loans & deposits. How?
-
7/30/2019 MOCB Finalest
10/52
nvestment stan s etween cas ,loans & deposits
Cash low -- Investment sold to raise more cash
Cash high -- Cash placed in investment securities
Loan demand weak -- investment securities rises in bank to
provide more earning asset
Loan demand strong Investment will be sold to accumulateheavy loan demand
If deposits not growing in banks, investment securities again usedas collateral
Thus, Investments has a critical intersection position in the
balance sheet
-
7/30/2019 MOCB Finalest
11/52
Crossroads account on a banks balance sheet
Assets Liabilities
Cash DepositsAdd to
investmentwhen cash is In
excess
Sell investmentswhen loan
demand high
Sell investmentswhen cash
is low
Add toinvestmentswhen loan
demand weak
Investments
Loans
When deposits are low, useinvestment as collateral for
more non-deposit borrowings
Return investment pledge ascollateral to the investment
portfolio when deposit growthis strong
Non- DepositBorrowings
-
7/30/2019 MOCB Finalest
12/52
Expectedreturn and risk
Pledging
requirement-Securities bepledged as
collateral forpublic fund
deposits
Tax exposure
-
7/30/2019 MOCB Finalest
13/52
0
5
10
15
20
25
1 yr 2 yr 3 yr 4 yr 5 yr
The ladder or space maturity policy
% of the value of all securitiesheld
Strategy: Divide investmentportfolio equally among all
maturities acceptable tothe bank
Advantages: Reducesinvestment incomefluctuations/require littlemanaging expertise
-
7/30/2019 MOCB Finalest
14/52
Front end loaded maturity policies
0
10
20
30
40
50
60
70
80
1 yr 2 yr 3 yr 4 yr 5 yr
% in value of all securities held
Strategy: All security
investment are short terms
Advantages: strengthens thebanks liquidity positionand avoids large capitallosses if interest rates rise
-
7/30/2019 MOCB Finalest
15/52
Back end loaded maturity policies
0
5
10
15
20
25
30
35
1 yr 2 yr 3 yr 4 yr 5 yr 6 yr 7 yr 8 yr 9 yr 10 yr
% in value of all securities held
Strategy: All securityinvestments are longterm
Advantages:maximize the banksincome potentialfrom securityinvestment if interestrates fall
-
7/30/2019 MOCB Finalest
16/52
Barbell investment portfolio strategy
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1 yr 2 yr 3 yr 4 yr 5 yr 6 yr 7 yr 8 yr 9 yr 10 yr
% in value of all securities held
20%
30%30%
20%
Strategy: security holdingsare divided between short
terms and long term
Advantages: Helps to meetbanks liquidity need withshort term and achieveearning goals due to higherpotential earnings from longterm portfolio
-
7/30/2019 MOCB Finalest
17/52
A treasury is any place where
currency or items of highmonet ary value
are k ept
-
7/30/2019 MOCB Finalest
18/52
government whichmanages all money
and revenue
funds of agovernment or
institution
A depository wherewealth and
precious objectscan be kept
center of financialoperations within an
organisation
governmentdepartment
responsible forcollecting, managingand spending public
revenues
VariousForms of treasury
-
7/30/2019 MOCB Finalest
19/52
The management of an organization'sliquidity to ensure that the right amount of cash resources are available at the right placein the right currency and at the right time
using right instrument
It maximizes the return on surplus funds,
minimizes the financing cost of the businesscontrol interest rate risk and currencyexposure to an acceptable level.
-
7/30/2019 MOCB Finalest
20/52
The goals sought by the bank from its
investment portfolioGoals
The desired maturity range and degree of marketability (turn into cash immediately)sought for all securities purchased
Maturity range and
degree of marketability
The quality or degree of default risk
exposure the bank is willing to accept.
Risk Exposure
The degree of portfolio diversification toreduce risk the bank wishes to achievewith its portfolio
Portfoliodiversification
-
7/30/2019 MOCB Finalest
21/52
LIMITEDSERVICEGLOBAL
FULLSERVICEGLOBAL
LIMITEDSERVICELOCAL
FULLSERVICELOCAL
Range of services
C e n t r a
l i s a t i o n o f m
a n a g e m e n t c o n t r o
l
F ll S i L l
-
7/30/2019 MOCB Finalest
22/52
Full service Global1. Undertakes most of the Activities
2. Operates as the one treasury for all
markets3. Ultimately combines: a. Poolingrisks and b. Policies or strategies
Full Service Local1. Self-sustained local unit
2. Full range of activities
undertaken3. Guided by the needs of thelocal business
Limited Service Global1. Range of services limited.
Limited Service Local
1. Very small decentralizedtreasury
2. Virtually little or no
treasury activity.
Models of Treasury
Organisation
-
7/30/2019 MOCB Finalest
23/52
Scale or Spread
Focus
Complexity
-
7/30/2019 MOCB Finalest
24/52
Core functions of treasurydepartment-the dealing room, themiddle office and the back-office.
-
7/30/2019 MOCB Finalest
25/52
Core Functions of Treasury Department
Dealing Risk taking
Front-office
Risk Management Management InformationMid-office
Confirmations, Settlements,Accounting and
Reconciliation.Back-office
-
7/30/2019 MOCB Finalest
26/52
Buy, sell and trade inmoney market
instruments, securities,forex, equity, derivatives
and precious metal
Restructuring,reorganizing, pre
payment
Keep track of anddevelop their views on
different asset class,securities, currencies,derivative products
FRONT OFFICE
-
7/30/2019 MOCB Finalest
27/52
Significant interaction with various trading and delivery
teams
Liquidity Management
ALM implementation
Striking of Deals (trading) and earning profits from trading
Maintenance of CRR and SLR
FRONT OFFICE
-
7/30/2019 MOCB Finalest
28/52
Middle Office
Market risk whicharises on account
of:
- Interest ratemovement
- Foreignexchange rate
movement
- Commodityprices
- Equity prices
Liquidity risk Country risk
Independentmarket risk
Formation of Investment policy
for banks
treasury
Formation of ALM policy for
the bank.
Risk Management and Management Information
-
7/30/2019 MOCB Finalest
29/52
Back office
Co-ordinationwith front-office
Ensuringcompliancewith statedtreasuryproceduresandstipulations
Internalcontrol andcheck andaccounting
Monitoringof SLR/CRR
-
7/30/2019 MOCB Finalest
30/52
BACK-OFFICEOPERATIONS
Riskmanagement
TreasuryAccounting
Documentation
Financials,analysis,budgets
Regulatoryreporting
Systems andTele-
communications
Other functions of back office
-
7/30/2019 MOCB Finalest
31/52
Riskcommittee
Investment
committee
TreasuryMoneymarket
business unit
Asset Liability
ManagementCommittee
Cashreconciliation
Treasuryoperates infinancial
marketdirectly
Treasuryproductsare
marketableand liquid
Treasurycan monitorFXmovements
-
7/30/2019 MOCB Finalest
32/52
Meeting SLRrequirements!
-
7/30/2019 MOCB Finalest
33/52
Sample work flow model in TreasuryDivision- Standard Chartered.
The International Swaps and Derivatives MUREX:
-
7/30/2019 MOCB Finalest
34/52
pAssociation
MUREX:
Murex, the leading provider of integrated trading, riskmanagement and processing
solutions
full representation of the risktaken by their clients.
provide investment advicesdetailed risk analysis of theclient portfolio
what-if analysis on possiblemarket evolutions
market and credit riskmanagement.
-
7/30/2019 MOCB Finalest
35/52
-
7/30/2019 MOCB Finalest
36/52
Asset - Liability
Management (ALM)
-
7/30/2019 MOCB Finalest
37/52
Asset Liability Management
Keeping cost of liabilityas low as possible andyield on asset as high
as possible.
Mis-matches betweenliability and asset
should be reduced tominimum.
Assessment of various types of risks andaltering the asset liability-portfolio in adynamic way to manage risks.
-
7/30/2019 MOCB Finalest
38/52
Components of ALM
Assets Management
Liability Management
Risk Management
?
-
7/30/2019 MOCB Finalest
39/52
Monitor Interest margin spread
Manage Interest Rate Risk
Manage Liquidity Risk
Capital Adequacy Risk
Profit planning and growth projection
NEED?
-
7/30/2019 MOCB Finalest
40/52
Spread= Earning on assets Cost of liability
Cannot Charge morethan 4% above Prime
Lending Rate.
Cannot try to giveless interest to
depositors to keepthe cost low
Interest Rate
is marketdriven.
1. Monitoring Interest Rate Spreads
-
7/30/2019 MOCB Finalest
41/52
Particulars As % of total
Rate Cost Particulars As % of total
Rate Yield
OwnedFunds
8 - - Cash in hand 4.5 - -
Borrowings 12 9 1.080 Balance withRBI
8 4 .224
Current
Deposits
5.4 - - Investments 36 11 3.96
SavingsDeposits
17.6 4.5 0.792 Advances uptoRs. 25000
4.2 11 .462
Term 54 10 5.4 Advances uptoRs. 2 lacs
11.5 13.5 1.552
Advancesabove Rs. 2 lacs 14.1 16.75 2.362
Exports 4.7 9 0.423
N.P.A. 13.1 - -
Other Assets 2.5 - -
Total 100 7.272 Total 100 9.039
Yield- Cost = SpreadCost analysis
-
7/30/2019 MOCB Finalest
42/52
If savings interest rates fall then people invest in 15 or 30 days deposits.
If interest rate of long term deposits rise, investment in short term would fall.Yield on advances will go down with fall in interest rates.
As interest rates go up, old deposits will be withdrawn (if premature penalty
is not imposed), and re-invested as per the new rates. It will effect thespread.
Similarly, with securities or investments, rates going up, means newsecurities will be issued with higher coupon and price of existing securitieswill go down
Interest Rate is market sensitive.
2. Managing Interest Rate Risk
-
7/30/2019 MOCB Finalest
43/52
Match Fixed rate liabilities with fixed rate assets. Match Floating rate liabilities with floating rate
assets. Any mismatch will create a gap. Positive gap exists when,
Assets > Liabilities. Negative gap exists when,
Liabilities > Assets.
Matching of borrowings and lending is the solution.
Thus.
-
7/30/2019 MOCB Finalest
44/52
Difficult to haveperfect match
between assetsand liability.
Larger the numberof transactions,larger is the risk .
3. Managing Liquidity Risk
-
7/30/2019 MOCB Finalest
45/52
100 Crores of C.D. @10%Try to create an asset like L.C.
The net return would be 2-3%
However, if not able to create an asset- it invests thatamount in call money market.
It will give 5-6% return.
If it creates asset after some time, then at the time of maturity of C.D. amount would be outstanding.
It will have to go to call money market.
-
7/30/2019 MOCB Finalest
46/52
Gap Analysis
Liabilities Asset GapRs. 2500(Matched)
Rs. 2500(Matched)
Zero
Rs. 5000( Short termmaturity)
Rs. 6000( Short termmaturity)
+1000
Rs. 2500( Long termmaturity)
Rs. 1500( Long termmaturity)
-1000
ALM classifies the securities on the basisof their maturity by Gap Analysis.
Managing Liquidity is an issue!!
4 C i l Ad Ri k
-
7/30/2019 MOCB Finalest
47/52
Growth of assetsdepends on growthof capital.
Growth in Long term depositshave a negative impact onprofit if capital constraintsexist as money has to be
deployed in Zero Risk Govt.Securities (low yield).
Bank suffering from capitalconstraints may not be able
raise further capital frommarket as its performance
parameters may not be good.
Assets carry Risk Weightage.
4. Capital Adequacy Risk
-
7/30/2019 MOCB Finalest
48/52
Global best practices and keyperformance indicators of bank
treasury department.
you cant
-
7/30/2019 MOCB Finalest
49/52
ymanageanything
unless youmeasure it
Revenuegrowth
Revenuemix
Costefficiency
Return onaverageinvestedcapital
Dividendsper sharegrowth
Basicsearning
per share
-
7/30/2019 MOCB Finalest
50/52
Best practices in International TreasuryManagement,1999
1)Finance Structure is centralized Improved cash visibility Greater control Improved efficiency
2)Roles and responsibilities are clearly defined,
with management reporting focused on consistentformat and KPIs.
3)Develop efficient ways to bring companys cash
into investible balance
-
7/30/2019 MOCB Finalest
51/52
4) Minimize expenses in making payments
5) No rookies work in the department
6) Reasonable risk factors are identified and mitigated
7)Partnering with other components of the bank
8)Seeking constant improvement
9) Treasury workstations
-
7/30/2019 MOCB Finalest
52/52