Management of Banks and Financial Institutions
Asset Responsibility Management
Managing of Resources and Debts by Banks
Paul George 0921420
Meaning of ALM
ALM is an effort to match Possessions and Liabilities, in terms of Maturities and Rate of interest Sensitivities, to minimize Interest Rate Risk and Liquidity Risk.
вЂў ALM may be termed as a risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities.
вЂў It takes into account interest rates, earning power, and degree of motivation to take on financial debt and hence is likewise known as Surplus Management
ALM and NIM
вЂў ALM is all about useful management of balance sheet characteristics with regard to its size, constituents and top quality.
вЂў Is it doesn't process of controlling the Net Curiosity Margin (NIM) within the general risk bearing ability of the bank
вЂў ALM method depends on the comprehension of the balance sheet; the availability, accuracy and reliability, adequacy and expediency in the data and the MIS system
DEFINITION OF ALM
вЂў ALM is defined as, " the process of decision вЂ“ making to control risks of existence, stability and growth of a system through the energetic balances of its assets and liabilities. вЂќ
вЂў The text book meaning of ALM is usually " a risk management technique designed to gain an adequate return while maintaining a comfortable surplus of assets over and above liabilities. It requires into consideration interest levels, earning electricity and level of willingness to consider debt. Also, it is called surplus- managementвЂќ.
GOAL AND TARGETS OF ALM
вћў Assessment the interest level structure and compare a similar to the interest/product pricing of both assets and liabilities.
вћў Take a look at the loan and investment portfolios in the lumination of the foreign exchange risk and liquidity risk that might happen.
вћў Take a look at the credit rating risk and contingency risk that may originate either due to rate fluctuations or otherwise and assess the quality of property
вћў Review, the actual overall performance against the projections made and analyse the reasons for any impact on spreads.
вћў Purpose is to secure the short-term profits, long term earnings and long-term material of the lender. The variables that are picked for the purpose of stabilizing asset liability management of banks are:
-Net Curiosity Income(NII)
-Net Interest Margin(NIM)
-Economic Value Ratio
вЂў Net Curiosity Income-
Fascination Income-Interest Expenses.
вЂў Net Interest Margin-
Net Fascination Income/Average Total Assets
вЂў Economic Value Ratio-
Precisely the investors funds to the total resources measures the shifts in the ratio of owned funds to total cash. The fact assesses the nourishment capacity in the bank.
DANGERS INVOLVED IN ALM
вЂў Various Risks involved with Asset-Liability Managing are:
вЂ“ Interest Rate Risk
вЂ“ Forex trading Risk
вЂ“ Liquidity Risk
вЂ“ Credit Risk
вЂ“ Contingency Risk
MANAGEMENT OF LIQUIDITY RISK
Liquidity Risk: It is the risk of having not enough liquid assets to satisfy the liabilities at specific time.
вћў Stock Procedure
Stock Way is based on the amount of assets and liabilities as well as off balance sheet exposures over a particular time.
вЂў liquid assets to short term liabilities ratio
вЂў mortgage to deposits ratio
вћў Flow Procedure
вЂў Testing and taking care of net money requirements.
вЂў Managing Marketplace Access
вЂў Contingency Organizing
MANAGEMENT OF INTEREST RATE RISK
Interest Rate Risk: It is the risk of having a adverse impact on a bank's future earnings and the market value of the equity as a result of changes in interest rates.