1 MCF 304: Bank Management Lecture 2.4 Assets & Liability Management

2 In managing the assets & liabilities of a bank, management must take into consideration the cost and rate of return of each source of fund when determining the right mix of fund.

3 Assets & Liability Management Objectives; i.To ensure bank liquidity ii.All demands for deposits withdrawals are met iii.Ensure sufficiency of fund to fulfill loan applications iv.To maintain the net interest margin and profitability of the bank

4 Fund Gap Management Managing the interest rates of bank’s assets and liabilities in consideration of the maturity features of the same assets and liabilities. Fund Gap indicates total variable rate assets financed by fixed rate liabilities

5 Types of Bank’s Assets & Liability Management Matching Rate interest rates receivables from acquired assets exceeded the interest rates payable on liabilities E.g, a three years loan tenure is finance by a deposit with two years tenure

6 Types of Bank’s Assets & Liability Management Variable Rate Asset Involves the bank assets & liabilities with variable interest rates Usually have short maturity period & interest rates are charges according to prevailing situations If variable rate assets are matched with variable rate liabilities, the net profit margin can be maintain Net profit margin = (interest received – interest paid) acquired assets

7 Variable Rate Asset Variable Assets Rate -REPO -Short terms loans and investment -Variable rates terms loans Variable Liabilities Rate -Short term deposits -REPO -NCD -Short term financing

8 Types of Bank’s Assets & Liability Management Fixed Rates Matching fixed interest rates with longer maturity period If fixed interest rates are matched against fixed rates liabilities, the net profit margin will change gradually over time as the value of fixed assets and liabilities change over time

9 Fixed Rates Fixed Rate Assets -Mortgages -Fixed rate term / installment loans -Leased assets -Long term investments Fixed Rate Liabilities -Long term debt / liabilities -Minimum balances in current / saving accounts -Capital funds

10 Fund Gap Management Rising Interest Rates -Banks should have more variable assets which are financed by with fixed and low interest rates -Funds should be shifted towards short term investments while loans to variable rate Highest Level -Fund gap is at its widest peak -Bank should move their funds to long term securities and fixed rate loans -Bank should shorten the maturity periods of their liabilities

11 Fund Gap Management Declining Interest Rates -Bank should narrow their funds gap by reducing variable rates assets which are financed by fixed rate liabilities Lower Level Interest Rates -Fund gap is at their lowest level. -Bank should; i.Extend the liability periods of liabilities ii.Shorten the maturity periods of investments iii.Limit fixed rate loans and procure short term debts iv.Encourage variable rate loans

12 Thank You! Izdihar Md Daud Post Graduate Centre HP: