1. Asset Liability Management in Banks-1 Fairuz Chowdhury Lecturer, BBS

2. Components of a Bank Balance Sheet

3. Banks profit and loss account A bank’s profit & Loss Account has the following components: I. Income: This includes Interest Income and Other Income. II. Expenses: This includes Interest Expended, Operating Expenses and Provisions & contingencies.

4. What is Asset Liability Management??  The process by which an institution manages its balance sheet in order to allow for alternative interest rate and liquidity scenarios.  Banks and other financial institutions provide services which expose them to various kinds of risks like credit risk, interest risk, and liquidity risk.  Asset-liability management models enable institutions to measure and monitor risk, and provide suitable strategies for their management.

5. Measurement of Interest Rate  YTM: the discount rate that equalizes the current market value of loan or security with expected stream of future payments the loan or security will generate.  Discount Rate:(face value- purchase price) * 360 face value* number of days  YTM equivalent??  Basis Points??

6. Components of Interest rate  market int. rate of a risky asset= risk free rate + risk Premium  Risk Premiums:  Default Risk Premium  Inflation Risk Premium  Liquidity Risk Premium  Call Risk  Fisher Effect??

7. Yield Curve  A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt.

8. ALCO  ASSET-LIABILITY COMMITTEE – ALCO: A risk-management committee in a bank or other lending institution that generally comprises the senior-management levels of the institution. The ALCO's primary goal is to evaluate, monitor and approve practices relating to risk due to imbalances in the capital structure. Management: Interest rate risk ( must)  Protect ( Net Interest Margin) NIM: NIM= INTERST INCOME- INTEREST EXP. TOTAL EARNING ASSETS

9. Interest Sensitive Gap Management  Gap Management: perform an analysis of maturities and repricing opportunities associated with interest bearing assets and with interest bearing liabilities.  If management feels its institution is excessively exposed to interest rate risk, it will try to match as closely as possible the volume of assets that can be repriced as interest rates change with vol. of liabilities whose rates can be adjusted.  $ amount of repriceable assets= $ amount of repriceable liabilities Loans about to mature or come up to renewal or repricing CDs that are about to mature or eligible to be renewed

10. GAP Management  The GAP is the portion of the balance sheet affected by interest rate risk:  Int.-sensitive gap= Int. sensitive assets- Int. sensitive liabilities  Asset-sensitive +ve gap= Int. sensitive asses- Int. sensitive liabilities> 0 Int. Rate … Interest income …. NIM  Liability sensitive –ve gap=Int. sensitive asses- Int. sensitive liabilities< 0 Int. Rate …. Interest expense … NIM  Relative IS Gap= >0 Institute is asset sensitive <0 Institute is liability sensitive  Interest Sensitivity Ratio= IS GAP SIZE OF INSTITUTE ISA ISL