Transcript ALM Guidelines Short

ASSET LIABILITY
MANAGEMENT (ALM)
History of bank failures in US
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2012 - 23
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2011 - 89
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2010 - 157
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2009 - 140
Components of a
Bank Balance sheet
Liabilities
Assets
1.
2.
3.
4.
5.
1. Cash & Balances with
RBI
2. Bal. With Banks &
Money at Call and
Short Notices
3. Investments
4. Advances
5. Fixed Assets
6. Other Assets
Capital
Reserve & Surplus
Deposits
Borrowings
Other Liabilities
Contingent Liabilities
Business Risks
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Operational Risk
Credit Risk
Market Risk
Liquidity Risk
Interest Rate Risk
Foreign Exchange Risk
Information Risk
What is ALM ?...
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Concerned with strategic Balance Sheet
management
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Match between assets and liabilities in BS
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Risks stem from mismatch between A&L –
credit, liquidity, interest, currency
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ALM is not to avoid risk but to manage risk,
sustaining profitability
What is ALM ?...contd..
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Periodic monitoring of risk
involving
collecting
and
information
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Ability to anticipate, forecast and act so as
to structure bank’s business to profit
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Altering A & L portfolio in a dynamic way to
manage risks
Involves judgement and decision making
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exposures
analysing
Defining ALM
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ALM involves Planning, directing and
Controlling the flow , mix, cost and yield
of the consolidated funds of bank
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Assesses various asset mixes, funding
combinations, price volume relations and
their implications on Liquidity, Income and
Capital ratio
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Planning procedure which accounts for
all assets and liabilities of a bank by
rate, amount and maturity
Why ALM ?
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Banks exposed to credit and market risks
in view of asset-liability transformation
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Risks increased with liberalisation and
growing integration of domestic markets
with external markets
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Banks now operate in deregulated
environment and are required to determine
interest rates on various products
Why ALM ?.. Contd..
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Need to maintain balance among spread,
profitability and long-term viability
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Increasing volatility in domestic interest
rates as well as foreign exchange rates
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New financial product innovation
Why ALM ?.. Contd..
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Increased level of awareness among top
management - market risks, interest rate
movements
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Intense competition for business involving
both assets and liabilities
Why ALM ?.. Contd..
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Regulatory initiatives
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International initiative – Basle Committee
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Thus, a call for structured
comprehensive
measures
institutionalising
an
integrated
management system
and
for
risk
Overall Objective..
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The central theme of (ALM) is the
management of a bank’s entire balance
sheet on continuous basis with a view to
ensure a proper balance between funds
mobilisation and their deployment with
respect to their maturity profiles, cost and
yield as well as risk exposure so as to
improve profitability, ensure adequate
liquidity, manage risks and ensure long
term viability
RBI / NABARD Guidelines on ALM
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Draft guidelines issued on 10 Sept 1998
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Final guidelines issued on 10 Feb 1999 for
implementation from 1 April 1999
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At least 60% of assets and liabilities to be
covered initially
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100% coverage from 1 April 2000
RBI / NABARD Guidelines on ALM
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NABARD guidelines on Risk
Systems in Banks – April 2005
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Guidelines were issued to 5 select State
Cooperative Banks viz. Andhra Pradesh,
Tamil Nadu. Maharashtra. Punjab and
West Bengal SCBs and 12 selected RRBs
for implementation of Asset - Liability
Management
(ALM)
System
wef
1.4.2007- so far satisfactory .
Management
RBI / NABARD Guidelines on ALM
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BOS
Meeting
27.3.2008
decided
introduction of ALM in all the SCBs & RRBs
wef 1.7.2008
ALM to be introduced in phased manner in
DCCBs.
Initially selected 31 DCCBs for ALM wef
1.9.2008
Interim target to cover 100% business by
1.4.2009
RBI / NABARD Guidelines on ALM
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Once system stabilises, bank gain
experience- swtch over to sophisticated
computerised techniques –Duration Gap
analysis, Simulation & VaR for Interest
rate risk management
RBI / NABARD Guidelines on ALM
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Review of computerisation in bank
Suitability of manpower –implementation
ALM policy approved by BOD
Constitute ALCO to review ALM implementation
in bank
Start generating reports as required
Capacity building (KM) of nodal officer
Upgrade MIS for preparation of reports
Send detailed monthly progress reports- present
status, progress made & action plan for future
ALM Process- Three pillars
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ALM Information System
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ALM Organisation
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Management Information System
Information availability, accuracy, adequacy and
expediency
Structure and responsibilities
Level of top management involvement
ALM Process
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Risk
parameters,
risk
identification,
risk
measurement, risk management, risk policies and
procedures, prudential limits & auditing, reporting
& review
ALM Information Systems
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Information is the key to the ALM process
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Varied business profiles – no uniform ALM system
for all banks
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Methods range from simple Gap statement to
extremely sophisticated simulation methods.
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Availability of adequate, timely and accurate
information, the central element for ALM exercise
ALM Information Systems-Challenges
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Large network of branches and lack of an
adequate support system to collect information
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Problem to be addressed through ABC
approach – atleast 60-70% of total businessanalysing behaviour of assets and liabilities in
sample branches
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Investment portfolio – easy since centralised
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Spread of computerisation helps
ALM Organisation
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Board to have overall responsibility and frame risk
management policy
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Board to set limits for liquidity, interest rate and
exchange rate risks
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ALCO (Asset Liability Committee) consisting of
senior management including CEO decides strategy
and adheres to objective
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ALM Support Groups, responsible for analysing,
monitoring and reporting the risk profiles to ALCO
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Staff also prepare the forecasts (simulations)
showing effects and recommend action
ALCO-responsibilities
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ALCO decision making unit- Responsible for
balance sheet planning from risk return
perspective
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Monitoring the market risk levels by ensuring
adherence to the various risk limits set by the
bank
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Articulating the current interest rate view and a
view on future direction of interest rate
movements
ALCO-responsibilities
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Deciding the business strategy of
the bank, consistent with the
interest rate view, budget and predetermined
risk
management
objectives
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Determining the desired maturity
profile and mix of assets and liabilities
ALCO-responsibilities..contd..
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Product pricing for both assets and
liabilities side
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Deciding the funding strategy i.e. source
and mix of liabilities or sale of assets
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Reviewing implementation of decisions
made in the previous meeting
Composition of ALCO
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The size of ALCO depends on size of
institution, business mix and organisational
complexity
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CEO to head the Committee
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Chiefs of Investment, Credit, Resource
Management,
Funds
Management/
Treasury, Banking and Economic Research
to be members of the Committee
Composition of ALCO….
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Head of Technology Division be an invitee
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Some banks may have sub-committees
and support groups
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Management committee to oversee and
review
ALM Process
Scope of ALM function can be defined as:
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Liquidity Risk Management
Interest rate risks management
Trading risk management
Funding and capital planning
Profit planning and growth projection
RBI guidelines mainly cover Liquidity and
Interest rate risks
Policy for creation of liabilities
An appropriate policy for creation of
liabilities has to take care that:
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Adequate financial resources (i.e.funds) are
mobilised keeping in view the bank’s
deployment requirements
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The cost of liabilities in terms of interest
cost is least and is reduced from time to
time
Policy for creation of liabilities
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The servicing / operational cost of the
liabilities is kept low with emphasis on
volumes
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The liabilities should come from fairly
diversified sources so that set backs in
one area do not affect the overall financial
resource position
Policy for creation of assets
An appropriate policy for creation of
assets has to aim at:
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Making provisions for meeting statutory
requirements like reserves-CRR, SLR
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Maximising of the yield or return on
various components of assets
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Maintenance of adequate liquidity
through appropriate mix of assets
Policy for creation of assets…
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Diversification of assets so as to
minimise losses
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Lending advances with prudence based
on risk perception with the sole
objective that it should not turn out to
be non-performing
Liquidity Risk Management
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Assured ability to meet its liabilities as they
become due reduces the probability of an
adverse situation developing
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Liquidity shortfall in one institution can
have repercussions on the entire system
Liquidity Risk Management….
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Assets commonly considered as liquid like
Government securities and other money
market instruments could also become
illiquid when the market and players are
unidirectional
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Liquidity has to be tracked through
maturity or cash flow mismatches
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Use of maturity ladder – standard tool
Statement of structural liquidity
Time buckets for maturity profile
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ii.
iii.
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v.
vi.
vii.
viii.
1-14 days
15-28 days
29 days and upto 3 months
Over 3 months and upto 6 months
Over 6 months and upto 1 year
Over 1 year and upto 3 years
Over 3 years and upto 5 years
Over 5 years
Liquidity mismatches… contd..
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The mismatches during 1-14 & 15-28 days not to
exceed 20% of cash outflows
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Maturing liability is a cash outflow and maturing
asset is a cash inflow
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Tolerance level in mismatches to be determined
based on asset-liability base, nature of business,
future strategy etc.
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Banks to monitor their short term liquidity on a
dynamic basis over a time horizon spanning
from 1-90 days (short term dynamic liquidity
statement)
Estimation of short term dynamic liquidity
Interest Rate Risk
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Interest rate risk is the risk where changes
in the market interest rates might adversely
affect a bank’s financial condition
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Immediate impact would be on bank’s
earnings by changing its NII
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Long tem impact of changing interest rates
would be on bank’s Net Worth
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Interest rate risk is measured in terms of
change in NII
Interest Rate Risk…
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Traditional Gap analysis method is to be used
now
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Move over to modern techniques of Interest
Rate Risk measurement like Duration Gap
analysis, simulation, VAR gradually
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Gap or Mismatch analysis measures gaps
between rate sensitive assets and rate sensitive
liabilities
Interest Rate Risk-measurement
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An asset or liability is considered rate
sensitive if:
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Within the time interval under consideration
there is a cash flow
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the interest rate resets/reprises
contractually during the period
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RBI changes the interest rates
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It is contractually pre-payable or
withdrawable before the stated maturity
Interest rate sensitivity - Reporting format
Interest Rate Risk-measurement
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Gap report is generated by grouping the RSA,
RSL into time buckets according to residual
maturity or next reprising period, whichever is
earlier.
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All investments, advances, deposits, borrowings,
purchased funds etc that mature/reprise within a
specified timeframe are interest rate sensitive
Rate sensitive assets and liabilities
Interest Rate Risk-Gap in time buckets
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The gaps may be identified in the following time
buckets
i.
1-28 days
ii.
29 days and upto 3 months
iii.
Over 3 months and upto 6 months
iv.
Over 6 months and upto 1 year
v.
Over 1 year and upto 3 years
vi.
Over 3 years and upto 5 years
vii.
Over 5 years
viii.
Non-sensitive
Interest Rate Risk – Gap report
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The gap is the difference between RSA and RSL
for each time bucket
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RSA>RSL - positive gap
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RSA<RSL - negative gap
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Positive – beneficial with rising rates
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Negative – beneficial with declining rates
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Each bank should set prudential limits on
individual gaps with the approval of the
Board/Management Committee
General….
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Classification of various components of
assets and liabilities into different time
buckets made is benchmark
Better equipped banks may reclassify
based on data/studies subject to approval
of ALCO/Board
Note approved by ALCO/Board to be sent
to RBI
Summary….
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Coordinated financial management of BS
Risk by choice and not by chance
A pulse on approach to market risk
management
Increased awareness of market risks
Both science and an art
Thank you