Transcript CAIIB-RISK MANAGEMENTASSET LIABILITY MANAGEMENT – MODULE A G.R.RAO, Faculty, IIBF 11/7/2015 BANKING BUSINESS ON 26.09.2008 figures in crores DEMAND DEPOSITS 4,96,673 TERM DEPOSITS 29,45,465 34,42,138 LOANS, CC,OD BILL FINANCE 25,42,467 24,36,890 1,05,577 CASH : DEPOSIT RATIO =

CAIIB-RISK
MANAGEMENTASSET LIABILITY
MANAGEMENT –
MODULE A
G.R.RAO, Faculty, IIBF
11/7/2015
1
BANKING BUSINESS ON
26.09.2008
figures in crores
DEMAND DEPOSITS 4,96,673
TERM DEPOSITS
29,45,465
34,42,138
LOANS, CC,OD
BILL FINANCE
25,42,467
24,36,890
1,05,577
CASH : DEPOSIT RATIO = 9.91
CREDT: DEPOSIT RATIO =73.86
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BANKING BUSINESS Contd...
CRR : 9
S L R : 25
TOTAL 34
HOW BANKS MANAGE
CREDIT & CASH TOTALLING 83.77 %
OF DEPOSITS
BORROWING TO DEPOSITS: 11.74 %
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PRESENT DAY PRORITIES
 NET PROFIT WHICH IS OPERATING
PROFIT - PROV. & APPROPRIATIONS
 OPERATING PROFIT
(OP) =INT. INC. + OTH. INC.
NET.INT. INC.(NII) ALSO CALLED
SPREAD = INT. (EARNED – SPENT)
O.P. = (INT. EARNED – INT.SPENT)
- OTHER (EXPNS. – INC.)
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NII AND NIM
 BANKS WILL BE INTERESTED IN NIM
AND WOULD LIKE TO SEE IT GROW
 NIM MANAGEMENT IS MAINLY ASSET
AND LIABILITY MANAGEMENT
 IT MANAGES ASSETS AND
LIABILITIES TO IMPROVE NIM UNDER
A GIVEN RISK FRAME WORK
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ASSET LIABILITY MANAGEMENT
 ENSURE ACCEPTABLE NII / NIM AND
LONG TERM IMPROVEMENT IN NET
WORTH FOR A GIVEN RISK LEVEL
 INCLUDES PLANNING, ACQUIRING AND
DEPLOYING FUNDS FOR ABOVE
PURPOSE
 IT IS ONGOING PROCESS OF
FORMULATING, MONITORING,
REVISING AND FRAMING STRATEGIES
RELATED TO ASSETS AND LIABILITIES
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ALM Contd…
 ENCOMPASSES MANAGEMENT OF
LIQUIDITY AND INTEREST RISKS
 AVOIDS VOLATILITY, HELPS PRODUCT
INNOVATION AND COMPLIANCE OF
REGULATIONS
 IN REGULATED ENVIRONMENT IT IS
DAY TO DAY FUND MANAGEMENT
FUNCTION ONLY
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ALM Contd..
 FROM BALANCE SHEET ANGLE
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


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RESERVE MAINTENANCE
LIABILITY MANAGEMENT
ASSET MANAGEMENT
INVESTMENT MANAGEMENT
CAPITAL MANAGEMENT
LIQUIDITY MANAGEMENT
 FROM P&L
ANGLE
SPREAD MANAGEMENT
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ALM- FUNDS MANAGEMENT
 INCOME ON FUNDS LENT SHOULD
BE MAXIMUM
 EXPENSES ON FUNDS BORROWED
SHOULD BE REASONABLE
 ENNSURING FUND AVAILABILITY IS
LIQUIDTY MANAGEMENT
 AT REASONABLE COST IS INT. MGMT
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LIQUIDITY MANAGEMENT
 TO ENSURE SUPPLY OF NEEDED
FUNDS FOR
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EXISTING BUSINESS AND NEW
BUSINESS
TAKE CARE OF MIS-MATACHES IN
MATURITIES OF ASSETS & LIABILITIES
PROJECTS FINANCIAL STRENGTH TO
SOCIETY AND BANKING SYSTEM WHICH
IN TURN ENABLES EASY AVAILABILITY
OF FUNDS AT REASONABLE COST
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HOW LIQUIDITY GETS AFFECTED
 DUE TO REGULATORY CHANGES
 DUE MARKET CHANGES BOTH
EXISTING AND POTENTIAL
 DUE TO CUSTOMERS’ ACTIONS
 DUE TO CRYSTALLISATION OF
CONTINGENT LIABILITIES
 DUE TO NPAs
 BIG FRAUDS
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LIQUIDITY MANAGEMENT
 ESTIMATION OF SIZE AND TIME OF
FUND REQUIREMENTS CORRECTLY
 PLANNING APPROPRIATELY IN
ADVANCE CONSIDERING COSTS AT
DIFFERENT TIMES
 ACQUIRE FUNDS AT OPTIMUM
COSTS
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LIQUIDITY MANAGEMENT
 WHY CASH FLOW ESTIMATES CAN
GO WRONG


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DECREASE IN ANTICIPATED
REALISATIONS BOTH PRINCIPAL & INT.
INCREASE IN NPA LEVELS BEYOND
ESTIMATES
SUDDEN SPURT IN ASSET BEYOND
BANK’S CONTROL
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LIUQUIDITY MANAGEMENT
TYPES OF RISKS IN LIQUIDITY MGMT
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FUNDING RISK
NEED TO PROVIDE FUNDS FOR
UNEXPECTED OUTGOINGS
TIME RISK
NEED FOR COMPENSATING NON REALISED
SOURCES
CALL RISK
CRYSTALLISATION OF CONTINGENCIES
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FOREIGN CURRENCY LIQUIDITY
MANAGEMENT- PROCESS
FINALISE STRATEGY (QUALITY&
QUANTITY) FOR EACH CURRENCY OF
EXPOSURE
STIPULATE LIMITS FOR TOLERANCES REG.
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MISMATCHES IN DIFFERENT TIME BANDS
LOAN TO DEPOSIT AND LOAN TO CAPITAL
LIQUID ASSETS TO ST LIAB.
MEASURE, MONITOR AND MANAGE
LIQUIDITY
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LIQUIDITY MANAGEMENT
 IDENTIFICATION OF PRIMARY AND
SECONDARY RESOURCES
 DIVERSIFICATIONOF RESOURCES
 CRISIS SCENARIO STUDIES
 CONTINGENCY PLANNING
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DIFFERENT APPROACHES TO
LIQUIDITY MANAGEMENT
 STOCK APPROACH & FLOW A PPROACH
 IN FLOW APPROACH INFLOWS AND
OUTFLOWS ARE MEASURED FOR
DIFFERENT TIME BUCKETS AND UNDER
DIFFERENT SCENARIOS LIKE
NORMAL TIMES, BANK SPECIFIC CRISIS
AND SYSTEMIC CRISIS AND FUNDING
AVENUES IDENTIFIED
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RBI GUIDELINES
 GROUP LIKELY INFLOWS AND
OUTFLOWS INTO DIFFERENT TIME
BUCKETS AND PRESCRIBING MAX
MISMATCH IN NEAR TERM BUCKETS
1 DAY
5%
2-7 DAYS
10%
8-14 DAYS
15%
5-28 DAYS
20%
PERCENTAGES ARE MAX. FOR
RESPECTIVE TIME BUCKET
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INTEREST RISK MANAGEMENT
 RISK OF INT. INC. GETTING AFFECTED
DUE TO EXTERNAL FACTORS ONLY
 MARKET INTEREST RATES AND
 REGULATORY INTEREST RATES
 IMPACT WILL BE ON BOTH ADVANCES
AND INVESTMENTS
 LIQUIDTY AND INTEREST RISK ARE NOT
EXCLUSIVE
 NOT ALL ASSETS OR LIAB. WILL BE
IMPACTED
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INTEREST RISK MANAGEMENT
 GAP OR MISMATCH RISK

IT IS RISK DUE TO FUNDING OF
ASSETS WHICH WILL REPRICE IN
DIFFERENT PERIOD FROM THAT OF
LIABILITIES
 BASIS RISK
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DUE TO DIFFERENT IMPACT ON
ASSETS AND LIABILITIES IN THE SAME
TIME BUCKET
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INTEREST RISK Contd…
 EMBEDDED OPTION RISK

INHERENT RIGHT WITH AN ASSET OR
LIABILITY FOR REPRICING
 YIELD CURVE RISK OR RATE LEVEL
RISK
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DUE TO CHANGES INITIATED BY
REGULATOR/ MARKET FORCES
 VOLATILITY RISK
 SUDDEN VOLATILITIES IN MARKT.
MORE IN CASE OF BORROWED FUNDS
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MEASUREMENT OF INTEREST RISK
 GAP METHOD AND ANALYSIS
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GROUP RATE SENSITIVE ASSETS AND
LIABILITIES INTO DIFFERENT BUCKETS
STUDY THE IMPACT OF INTEREST CHANGES
BOTH POSITIVE AND NEGATIVE ON THE NIM
 DURATION METHOD
 MODIFIED DURATION METHOD
 SIMULATION APPROACH
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STATIC AND DYNAMIC SIMULATION
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GAP ANALYSIS
 GAP IS + VE IF ASSETS > LIABILITIES
Δ NII = GAP * Δr ( CHANGE IN INT. RATE)
NIM = NII / EARNING ASSETS(EA)
GAP * Δr = ΔNIM * EA = NIM* EA * ΔC
ΔC IS ACCEPTABLE CHANGE IN NIM
WORKING BACKWARDS YOU CAN
ARRIVE AT THE ACCEPTABLE GAP
FOR AN ACCEPTABLE ΔC
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LIMITATIONS IN GAP METHOD
 GAP MAY NOT BE AMENABLE TO
CHANGE TO SUIT DESIRED ΔC
 PRESUMES THAT BOTH ASSETS AND
LIAB. WILL BE UNIFORMLY IMPACTED
 DOESNOT TAKE INTO ACCOUNT TIME
VALUE OF CASH FLOWS
 WHEN THERE IS SIGNIFICANT CHANGE
EVEN THOSE WHICH ARE NOT TO BE
REPRICED WILL BE REPRICED
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ADJUSTED DURATION
 IN THIS METHOD ASSETS AND
LIABILITIES ARE GROUPED
DEPENDING UPON THEIR EXTENT OF
LIKELY IMPACT AND NOT INTO TIME
BUCKETS BY ASSIGNING DIFFERENT
WEIGHTS
 RATE ADJ. GAP = ∑ WAI* AI – ∑ WLI*LI
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MODIFIED DURATION
 MODIFIED DURATION (MD) IS USED TO
STUDY THE CHANGE IN PRICE OF AN
ASSET DUE TO A CHANGE IN INTEREST
RATE
 MD = D/ (1+ r) AND
PC = - MD* Δ r / 100
PC IS CHANGE IN PRICE AND Δ r IS
CHANGE IN INTEREST RATE IN BASIS
POINTS AND THIS IS USEFUL ONLY IN
CASE OF SMALL CHNGES IN INTEREST
RATES
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MANAGEMENT OF FOREX RISK
 TRANSACTION EXPOSURE

CURRENCY RISK IN SPECIFIC FOREX
TRANSACTION BETWEEN EXECUTION
AND SETTLEMENT
 TRANSLATION EXPOSURE

CURRECNY RISK INVOLVED AT THE
TIME OF REPORTING TRANSACTIONS
AT THE END OF ACCOUNTING YEAR TO
H.O.
 OPERATING EXPOSURE
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FOREX RISK MGMT. TOOLS
 FORWARDS
 FUTURES-CURRENCY
 OPTIONS
 SWAPS
 MONEY MARKET INSTRUMENTS
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MONEYMARKETINSTRUMENTS CAN BE
USED LIKE A FORWARD CONTRACT
INMGMT. OF FOREX RISK
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RISK MGMT. IN DEALING ROOM
 OPEN POSITION
 OVERNIGHT AND DAY LIGHT LIMITS
 STOP LOSS LIMITS
 CAP ON SIZE OF TRANSACTION
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TWO PRACTICAL PROBLEMS
ON DURATION ANALYSIS
1. ASSETS AND LIABILITIES OF FMG FINANCES
ALONGWITH THEIR DURATION AND INTEREST
RATRES ARE AS PER GIVEN TABLE. IDENTIFY RISK
SENSITIVEGAP AND NIM. DURING AFORECASTING
PERIOD OF 1YEAR IF INTEREST RATES FALL BY 2 %
WHAT WOULD BE IMPLICATION ON NIM
2. ABC BANK HAS EARNING ASSETS AMNOUNTING TO
Rs 1980 CRORES AND THEIR NIM IS 4%.
MANAGEMENT’S POLICY SAYS THAT A 2.5%
DEVIATION FROM NIM IS ACCEPTABLE. BANK
FORECASTS THAT INTEREST RATES WOULD
INCREASE BY 0.75% DURING NEXT12 MONTHS.
WHAT SHOULD BE THE GAP OF THE BANK IF THEY
HAVE TO BE WITHIN THE GIVEN RANGE OF NIM
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OBJECTIVE QUESTIONS
1. THE NEED TO REPLACE NET OUTFLOWS
DUE TO UNANTICIPATED WITHDRAWAL OF
DEPOSITS IS KNOWN AS ---------RISK.
2. THE NEED TO COMPENSATE FOR NONRECEIPT OF EXPECTED INFLOWS OF
FUNDS IS CLASSIFIED AS -----RISK.
3. CALL RISK ARISES DUE TO
CRYSTALLISATION OF ------.
4. MATURITY LADDERS ENABLES THE BANK
TO ESTIMATE THE DIFFERENCE BETWEEN----AND------IN PREDETERMINED PERIODS.
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OBJECTIVE QUESTIONS
Q. THE INSTITUTION IS IN A POSITION TO BENEFIT
FROM RISING INTEREST RATES WHEN ASSETS
ARE ……………THAN LIABILITIES.
A. LESSER.
B. GREATER
C. EQUAL
D. HALF.
Q. THE LIQUIDITY RISK ARISING OUT OF
UNANTICIPATED WITHDRAWAL OR NON
RENEWAL OF DEPOSITS IS CALLED AS
A. FUNDING RISK.
B. TIME RISK.
C. MARKET RISK
D. OPERATIONAL RISK.
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OBJECTIVE QUESTIONS
Q.LIQUIDITY RISK ARISING OUT OF CRYSTALLIZATION OF
LIABILITIES AND CONVERSION OF NON FUND BASED
LIMITS TO FUND BASED LIMITS IS KNOWN AS
A. CALL RISK.
B. TIME RISK.
C. OPERATIONAL RISK.
D. MARKET RISK.
Q. STOCK APPROACH OF MEASURING AND MANAGING
LIQUIDITY RISK AND FUNDING REQUIREMENTS IS
BASED ON
A. LEVEL OF ASSETS AND LIABILITIES AND BALANCE
SHEET EXPOSURE ON A PARTICULAR DATE.
B. BASED ON STOCKS PLEDGED TO BANK IN CASH
CREDIT ACCOUNT
C. STOCK OF INVESTMENTS OF BANK.
D. NONE OF ABOVE.
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OBJECTIVE QUESTIONS
Q. UNDER GAP METHOD THE NET FUNDING
REQUIREMENT IS CALCULATED BASED ON
A. RESIDUAL MATURITIES OF ASSETS AND LIABILITIES.
B. ACTUAL MATURITIES OF ASSETS AND LIABILITIES
C. BOTH THE ABOVE.
D. NONE OF ABOVE.
Q. CASH INFLOWS ARISE FROM MAINLY:
A. MATURING ASSETS.
B. MATURING LIABILITIES.
C. MATURING OFF BALANCE SHEET EXPOSURE.
D. MATURING TIME DEPOSITS.
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OBJECTIVES
Q. IF THERE IS SIGNIFICANT DEFICIT OBSERVED SAY AFTER
30 DAYS PERIOD OPTION AVAILABLE FOR BANK IS TO
A. ACQUIRE AN ASSET MATURING ON THAT DAY.
B. RENEW OR ROLL OVER A 30 DAY LIABILITY.
C. ACQUIRE A LIABILITY MATURING AFTER 30 DAYS.
D. NONE OF ABOVE.
Q. PRESENTLY NUMBER OF SUB DIVISIONS IN 1-14 DAYS
TIME BUCKET FOR STRUCTURAL LIQUIDITY ARE
A. FOUR.
B. THREE
C. FIVE .
D. NONE OF ABOVE.
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OBJECTIVES
Q. CAPITAL , RESERVES AND SURPLUS ARE SLOTTED
IN WHICH TIME BUCKET IN STRUCTURAL LIQUIDITY
STATEMENT:
A. OVER 5 YEARS.
B. OVER 3 YEARS.
C. OVER 1 YEAR.
D. OVER 6 MONTHS.
Q. SAVING AND CURRENT DEPOSIT MAY BE TREATED
AS VOLATILE PORTION UPTO
A. 10% AND 15 % RESPECTIVELY.
B.20% AND 30% RESPECTIVELY.
C. 30% AND 40% RESPECTIVELY.
D. NONE OF ABOVE
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OBJECTIVES
Q.
WHAT IS BASIS RISK:
A. RISK THAT INTEREST RATE OF DIFFERENT ASSETS AND
LIABILITIES MAY CHANGE IN DIFFERENT MAGNITUDES IS
CALLED BASIS RISK.
B. RISK RELATING TO BASIS ON WHICH LOAN IS SANCTIONED.
C. RISK RELATED TO YIELD CURVE.
D. NONE OF ABOVE.
Q. ONE OF THE STRATEGIES FOR REDUCING THE ASSET OR
LIABILITY SENSITIVITY COULD BE :
A. INCREASE FLOATING RATE INSTRUMENTS.
B. INCREASE FIXED RATE INSTRUMENTS.
C. NONE OF ABOVE.
D. ALL THE ABOVE.
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OBJECTIVES
Q. HIGHER THE DURATION IMPLIES THAT A GIVEN CHANGE
IN THE LEVEL OF INTEREST RATES WILL HAVE
A. LARGER IMPACT ON ECONOMIC VALUE.
B. SMALLER IMPACT ON ECONOMIC VALUE.
C. NO IMPACT.
D. NONE OF ABOVE.
Q. DURATION WILL BE HIGHER IF
A. LONGER THE MATURITY DATE OR SMALLER THE
PAYMENTS THAT OCCUR BEFORE MATURITY ( COUPON
PAYMENTS)
B. SHORTER THE MATURITY AND HIGHER THE PAYMENTS
THAT OCCUR BEFORE MATURITY ( COUPON PAYMENTS)
C. NONE OF ABOVE.
D. ALL THE ABOVE.
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OBJECTIVES
Q. SHORT TERM DYNAMIC LIQUIDITY STATEMENT RELATE
TO
A. MONITORING LIQUIDITY ON DYNAMIC BASIS OVER A TIME
HORIZON OF 1-90 DAYS.
B. MONITORING LIQUIDITY ON DYNAMIC BASIS OVER A TIME
HORIZON OF 7-90 DAYS.
C. MONITORING LIQUIDITY ON DYNAMIC BASIS OVER A TIME
HORIZON OF 28-90 DAYS.
D. NONE OF ABOVE.
Q. IN STATEMENT OF INTEREST RATE SENSITIVITY :
A. ONLY RUPEE ASSETS AND LIABILITIES AND OFF BALANCE
SHEET POSITIONS SHOULD BE REPORTED.
B. ALL ASSETS AND LIABILITIES SHOULD BE REFLECTED.
C. ONLY FOREIGN CURRENCY ASSETS AND LIABILITIES
SHOULD BE REFLECTED.
D. NONE OF ABOVE.
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THANQ
WISH U ALL SUCCESS IN EXAM
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