1. CAIIB-RISK MANAGEMENT- ASSET LIABILITY MANAGEMENT – MODULE A
G.R.RAO, Faculty, IIBF
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2. BANKING BUSINESS ON 26.09.2008 figures in crores
DEMAND DEPOSITS 4,96,673
TERM DEPOSITS ,45, ,42,138
LOANS, CC,OD ,36,890
BILL FINANCE ,05, ,42,467
CASH : DEPOSIT RATIO = 9.91
CREDT: DEPOSIT RATIO =73.86
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3. BANKING BUSINESS Contd...
C R R : 9
S L R : 25
TOTAL 34
HOW BANKS MANAGE
CREDIT & CASH TOTALLING % OF DEPOSITS
BORROWING TO DEPOSITS: %
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4. 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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5. 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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6. 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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7. 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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8. ALM Contd.. FROM BALANCE SHEET ANGLE FROM P&L ANGLE SPREAD MANAGEMENT
RESERVE MAINTENANCE
LIABILITY MANAGEMENT
ASSET MANAGEMENT
INVESTMENT MANAGEMENT
CAPITAL MANAGEMENT
LIQUIDITY MANAGEMENT
FROM P&L ANGLE
SPREAD MANAGEMENT
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9. 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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10. LIQUIDITY MANAGEMENT TO ENSURE SUPPLY OF NEEDED FUNDS FOR
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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11. 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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12. 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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13. LIQUIDITY MANAGEMENT WHY CASH FLOW ESTIMATES CAN GO WRONG
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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14. LIUQUIDITY MANAGEMENT
TYPES OF RISKS IN LIQUIDITY MGMT
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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15. FOREIGN CURRENCY LIQUIDITY MANAGEMENT- PROCESS
FINALISE STRATEGY (QUALITY& QUANTITY) FOR EACH CURRENCY OF EXPOSURE
STIPULATE LIMITS FOR TOLERANCES REG.
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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16. LIQUIDITY MANAGEMENT IDENTIFICATION OF PRIMARY AND SECONDARY RESOURCES
DIVERSIFICATIONOF RESOURCES
CRISIS SCENARIO STUDIES
CONTINGENCY PLANNING
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17. 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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18. 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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19. 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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20. 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
DUE TO DIFFERENT IMPACT ON ASSETS AND LIABILITIES IN THE SAME TIME BUCKET
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21. INTEREST RISK Contd… EMBEDDED OPTION RISK
INHERENT RIGHT WITH AN ASSET OR LIABILITY FOR REPRICING
YIELD CURVE RISK OR RATE LEVEL RISK
DUE TO CHANGES INITIATED BY REGULATOR/ MARKET FORCES
VOLATILITY RISK
SUDDEN VOLATILITIES IN MARKT. MORE IN CASE OF BORROWED FUNDS
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22. MEASUREMENT OF INTEREST RISK
GAP METHOD AND ANALYSIS
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
STATIC AND DYNAMIC SIMULATION
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23. 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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24. 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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25. 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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26. 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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27. 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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28. FOREX RISK MGMT. TOOLS FORWARDS FUTURES-CURRENCY OPTIONS SWAPS
MONEY MARKET INSTRUMENTS
MONEYMARKETINSTRUMENTS CAN BE USED LIKE A FORWARD CONTRACT INMGMT. OF FOREX RISK
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29. RISK MGMT. IN DEALING ROOM
OPEN POSITION
OVERNIGHT AND DAY LIGHT LIMITS
STOP LOSS LIMITS
CAP ON SIZE OF TRANSACTION
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30. 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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31. 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 NON-RECEIPT 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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32. 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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33. 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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34. OBJECTIVE QUESTIONS 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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35. 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 .
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36. 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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37. 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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38. 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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39. 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 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.
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40. WISH U ALL SUCCESS IN EXAM
THANQ
WISH U ALL SUCCESS IN EXAM
11/24/2018