Transcript ASSET LIABILITY MANAGEMENT

RISK
MANAGEMENTMODULE B
MARKET RISK
The risk that the value of “on” or
“off” balance sheet positions will be
adversely affected by movements in
equity, interest rate markets,
currency exchange rates and
commodity prices.
A L M CONCEPT
• The fundamental objectives of ALM
are to maximise Net Interest Income
(NII) or Net Interest Margin (NIM) and
Market Value of Equity (MVE)
A L M CONCEPT
• Earnings Perspective involves analysing
the impact of changes on earnings in near
term.
• Economic Value Perspective involves
analysing the impact of interest on
expected cash flows from assets minus
expected cash flows from liabilities in long
term and its impact on equity or net worth
of the bank.
FOREIGN EXCHANGE RISK
The risk that the BANK may suffer
losses as a result of adverse
exchange rate movements during a
period in which it has an open
position, either spot or forward, or a
combination of the two in an
individual foreign currency.
LIQUIDITY RISK
• Ability of an organisation to meet its
commitments as and when they fall due.
• Liquidity needs can be met by
– Creation/assumption of fresh liability - Liability
management.
– Conversion of an existing asset - Asset
management.
MEASUREMENT OF
LIQUIDITY RISK
• Stock approach
- fixing Balance Sheet ratios
• Flow approach
- Liquidity Ladder or Gap Method
STOCK APPROACH
• Volatile Liability Dependence Ratio
Volatile Liabilities minus Temporary
Investments to Earning Assets net of
Temporary investments
• Shows the extent to which bank’s reliance
on volatile funds to support LT assets
• Growth in Core Deposits to growth in
assets
Higher the ratio the better
• Purchased Funds to Total Assets
• Loan losses to Net Loans
LIQUIDITY PARAMETERS
• Cap on daily Call Lending
– Allowed to lend maximum 50 % of Capital
funds on any given day during the fortnight.
• Cap on average Call Lending on a
fortnightly basis
– Average basis not to exceed 25 % of capital
funds.
• Cap on Daily Borrowing
– Allowed to borrow upto 125 % of capital funds
on any day during the fortnight.
• Cap on average Borrowing
– Average basis not to exceed 100 % of capital
funds
LIQUIDITY PARAMETERS
• Cap on Purchased funds
– Gross borrowings from Banks, RBI and other
FI including Certificate of Deposits and
Institutional deposit should not exceed 25 % of
Cash, balances with Banks, lending in call
money market and total investments.
• Cap on Gross Credit to Core Deposit.
– Gross credit should not exceed 85 % of the
core deposits (total deposits less interbank
deposits and bulk deposits of Rs. 10 cr and
above.)
• Cap on Gross Credit to Total Assets.
– Maximum total credit to total assets will be
65 %.
INTEREST RATE RISK
• Basle committee:
– Interest rate risk is the exposure of a bank's
financial condition to adverse movements in
interest rates.
• Changes in Interest rates is a threat to:
– Earnings
– Capital base
INTEREST RATE RISKS
•
•
•
•
Repricing Risk.
Basis Risk.
Yield Curve Risk.
Embedded Option risk.
REPRICING RISK
• Arises on account of mismatches in rates
• Can be measured by the measure of risk
in different time buckets
• Information needed
–
–
–
Balance sheet -on & off on a particular day
Business plan & expected income/ exp.
ignored
Static vs Dynamic
BASIS RISK
• Interest rates on assets and liabilities do not
change in the same proportion.
• When Bank Rate was raised by 2%, PLR was
raised by 1% and deposit rates by 1.5%
• Interest rates movement is based on market
perception of risk and also market imperfections.
• Therefore, basis risk arises when interest rates of
different assets and liabilities change in different
magnitudes.
YIELD CURVE RISK
• Even if interest rates on liabilities and assets are
of floating nature, there is danger of Interest Rate
Risk
• If the floating rates are based on different
benchmarks for assets and liabilities
• Bank prices its liabilities linked to 100 bp above
91-day TREASURY BILLS and assets to 300 bp
above 364-day TREASURY BILLS
YIELD CURVE RISK
• Assume funding a 2 year loan through a
91 day deposit • Deposit interest related to 100 basis
points over 91 day T-bill
• Loan was priced 300 basis points above
364 days T-bill resetting quarterly
• If the Yield Curve is flat NII is 200 basis
points
YIELD CURVE RISK - contd..
EMBEDDED OPTION RISK
• Pre-payment of loans in a falling
interest rate scenario ( for
contracting new loan at low rate )
• Premature withdrawal of deposits in
rising interest rate scenario ( for
reinvestment at higher rate )
• In either case, bank will receive lower
than anticipated NII
MEASUREMENT OF IRR
• Maturity Gap Analysis
– to measure interest rate sensitivity of
earnings or NII
• Duration Gap Analysis
– to measure interest rate sensitivity of
equity
• Simulation
• Value at Risk
MATURITY GAP ANALYSIS
• A maturity/repricing schedule –distribute
all interest sensitive assets & liabilities
into time bands.
• Time bands
– Related to maturities-if fixed interest
– Related to next repricing- if floating interest
• Relative differences in each time band –
represents the sensitivity in that band.
COL1
IMPACT OF INCREASE / DECREASE IN RATE OF INTEREST ON NII
COL2
COL3
COL4
COL5
Maturity pattern
1- 14 DAYS
15 - 28 DAYS
29 DAYS - 3 MTS
3-6 MONTHS
6-ONE YEAR
ONE - 3 YEARS
3-5 YEARS
ABOVE 5 YRS
RSL - OUTFLOWS RSA - INFLOWS
18785.27
31772.55
68403.39
87629.72
101260.22
108310.71
114558.21
134964.33
15920.09
31161.34
77914.78
90673.27
98917.23
106316.51
124538.91
137905.36
GAP - RSA - RSL CHANGE IN NII FOR
0.25 % DECREASE
-2865.18
-611.21
9511.39
3043.55
-2342.99
-1994.2
9980.7
2941.03
7.16
1.53
(-23.78)
(-7.61)
5.86
4.99
(-24.95)
-7.35
Thank You