Management of Banks and Financial Institutions

CIA-2

Asset Responsibility Management

Managing of Resources and Debts by Banks

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Posted By:

Paul George 0921420

Caroline 0921440

Poornima 0921449

Sonal 0921454

Anvin 0921459

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.

• ALM may be termed as a risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities.

• 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

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ALM and NIM

• ALM is all about useful management of balance sheet characteristics with regard to its size, constituents and top quality.

• Is it doesn't process of controlling the Net Curiosity Margin (NIM) within the general risk bearing ability of the bank

• 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

• ALM is defined as, " the process of decision – making to control risks of existence, stability and growth of a system through the energetic balances of its assets and liabilities. ”

• 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- management”.

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

• Net Curiosity Income-

Fascination Income-Interest Expenses.

• Net Interest Margin-

Net Fascination Income/Average Total Assets

• 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

• Various Risks involved with Asset-Liability Managing are:

– Interest Rate Risk

– Forex trading Risk

– Liquidity Risk

– Credit Risk

– 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.

• liquid assets to short term liabilities ratio

• mortgage to deposits ratio

вћў Flow Procedure

• Testing and taking care of net money requirements.

• Managing Marketplace Access

• 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.

Interest rate...

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