Banking:

Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector acts as the
backbone of modern business. Development of any country mainly depends upon the banking
system.
The term bank is either derived from Old Italian word banca or from a French word banque both
mean a Bench or money exchange table. In olden days, European money lenders or money
changers used to display (show) coins of different countries in big heaps (quantity) on benches or
tables for the purpose of lending or exchanging.
Oxford Dictionary defines a bank as "an establishment for custody of money, which it pays out
on customer's order."
Bank functions in short:

A short brief about banking industry in Bangladesh

Bangladesh is a third world country with an under developed banking system, particularly in
terms of the services and customer care provided by the government run banks. Recently the
private banks are trying to imitate the banking structure of the more developed countries, but this
attempt is often foiled by inexpert or politically motivated government policies executed by the
central bank of Bangladesh, Bangladesh Bank. The outcome is a banking system fostering
corruption and illegal monetary activities/laundering etc. by the politically powerful and
criminals, while at the same time making the attainment of services or the performance of
international transactions difficult for the ordinary citizens, students studying abroad or through
distance learning, general customers etc.

Risk Factors:
Risk is a part of human life. Banking is also a risk bearing industry. There are numerous risks in
banking activities. Bankers have to achieve their objectives by managing these risks.

Present banking industry expects that Banks equity holders will receive value along with profit
of their shares; depositors money will remain safe and the organization, as a whole will confirm
strength & transparency in all respect. To achieve this objectives Core Risks Management
guidelines are the prime issue in the present-day banking activities. Identification, measurement
and mitigation of risks and acquiring strength to cover these risks are the mandatory issues to be
maintained in the banking organization. Sonali Bank Limited has already introduced risk
management guidelines in accordance with Bangladesh Bank guidelines.
In recognition of the importance of an effective risk management system, Guidelines on
Managing Core Risks in banking has been issued by Bangladesh Bank in 2003. Primarily five
core risks have been identified and Asset Liability Management Risk is one of the important
risks for banks. (Now 7 core risks as per Bangladesh Bank guide line).

Credit Risks
Asset and Liability / Balance Sheet Risks
Internal Control & Compliance Risks
Money Laundering Risks and
Foreign Exchange Risks
IT risk
Environmental risk

Now a day Information Technology is also treated as one of the important area of risks in
Banking. However risks in the banking system are discussed in brief under broad head of risk
areas. Among them our group is going to concentrate on asset liability management risk. Lets
have a small discussion on asset liability management risk:

About asset liability management risk:

Management of coordination and integration of a banks asset with the management of its
liabilities to achieve the goals of the institution is known as Asset Liability Management.
Management of risks involved in asset and liabilities and compliance of law & regulatory
requirements is also an integral part of asset liability management.

The purpose of asset-liability management is to formulate strategies and take actions

that shape a banks balance sheet and protect the value of its assets, equity and net
income in a way that contributes to the banks desired goals.

Things started to change in the 1970s, which ushered in a period of

volatile interest rates that continued into the early 1980s. US regulation Q,
which had capped the interest rates that banks could pay depositors, was
abandoned to stem a migration overseas of the market for US dollar deposits.
Managers of many firms, who were accustomed to thinking in terms of accrual
accounting, were slow to recognize the emerging risk. Some firms suffered
staggering losses. Because the firms used accrual accounting, the result was not
so much bankruptcies as crippled balance sheets. Firms gradually accrued the
losses over the subsequent 5 or 10 years.
The origim:

One example is the US mutual lifeINSURANCE COMPANY the Equitable.

During the early 1980s, the US dollar yield curve was inverted, with short-term
interest rates spiking into the high teens. The Equitable sold a number of longterm guaranteed interest contracts (GICs) guaranteeing rates of around 16% for
periods up to 10 years. During this period, GICs were routinely for principal of
$100 million or more. Equitable invested the assets short-term to earn the high
interest rates they had guaranteed on the contracts. Short-term interest rates soon
came down. When the Equitable had to reinvest, it couldnt get nearly the
interest rates it was paying on the GICs. The firm was crippled. Eventually, it
had to demutualize and was acquired by the Axa Group.

Traditionally, banks and insurance companies used accrual accounting

for essentially all their assets and liabilities. They would take on
liabilities, such as deposits, lifeINSURANCE POLICIES or annuities.
They would invest the proceeds from these liabilities in assets such as
loans, bonds or real estate. All assets and liabilities were held at book
value. Doing so disguised possible risks arising from how the assets and
liabilities were structured.
Suppose a bank borrows $100 million at 3.00% for a year and lends the same
money at 3.20% to a highly-rated borrower for 5 years. For simplicity, assume
interest rates are annually compounded and all interest accumulates to the
maturity of the respective obligations. The net transaction appears profitable
the bank is earning a 20 basis point spreadbut it entails risk. At the end of a
year, the bank will have to find newFINANCING for the loan, which will have
4 more years before it matures. If interest rates have risen, the bank may have to
pay a higher rate of interest on the new financing than the fixed 3.20% it is
earning on its loan.
Suppose, at the end of a year, an applicable 4-year interest rate is 6.00%. The
bank is in trouble. It is going to be earning 3.20% on its loan and paying 6.00%
on its financing. Accrual accounting does not recognize the problem. TheBOOK
value of the loan (the banks asset) is:
($100 million)(1.032) = $103.2 million
[1]
TheBOOK VALUE of the financing (the banks liability) is:
($100 million)(1.030) = $103.0 million
[2]
Based upon accrual accounting, the bank earned $200,000 in the first year.
Market value accounting recognizes the banks predicament. The respective
market values of the banks asset and liability are:

($100 million)(1.032)5/(1.060)4 = $92.72 million

[3]
($100 million)(1.030) = $103.0 million
[4]
From a market-value accounting standpoint, the bank has lost $10.28 million.

ASSET LIABILITY STRUCTURE OF A BANK

PROPERTY AND ASSETS

Cash
Cash in hand
Balance with Bangladesh Bank

Balance With other Banks and Financial Institutions

In Bangladesh
Outside Bangladesh

Money at call and short notice

Investments
Government
Others

Loans and Advances

Loans, Cash credit, overdrafts etc. (including bills purchased and discounted)
In Bangladesh
Outside Bangladesh

Fixed Assets including Premises, furniture fixture and computer

Other Assets
TOTAL PROPERTY AND ASSETS

Liability Structure

LIABILITIES AND EQUITY

Liabilities
Borrowing from other banks, financial institution and agents
In Bangladesh
Outside Bangladesh

Deposit and Other accounts

Current Deposit and other accounts etc.
Bills Payable
Savings Bank Deposits
Term Deposits

Other Liabilities
Total Liabilities

Capital / Shareholders Equity

Paid-up Capital
Statutory Reserve
Other Reserves
Total Shareholders Equity

TOTAL LIABILITIES & SHAREHOLDERS EQUITY

Guidelines OF Bangladesh BANK

Policy about
Liquidity Coverage Ratio

Net Stable Funding Ratio

The policy
LCR or Liquidity Coverage Ratio is a
new liquidity standard introduced by
the Basel
Committee. This standard is built on
the methodologies of traditional
liquidity coverage
ratio used by banks to assess exposure
to contingent liquidity events. The
minimum
acceptable value of this ratio is 100
percent.
NSFR or Net Stable Funding Ratio is
another new standard introduced by
the Basel
Committee. The NSFR aims to limit
over-reliance on short-term wholesale
funding during

Leverage Ratio:

Advance to Deposit Ratio

WB Limit:

times of abundant market liquidity and

encourage better assessment of
liquidity risk across
all on- and off-balance sheet items.
The minimum acceptable value of this
ratio is 100
percent, indicating that available
stable funding (ASF) should be at least
equal to required
stable funding (RSF).
A minimum Tier 1 leverage ratio of 3%
is being prescribed by BB both at solo
and
consolidated level. Banks have to
maintain leverage ratio on quarterly
basis.
Although commonly known as Advance
to deposit ratio, actually the ratio is
determined by
putting Advance in numerator and
Liabilities (excluding capital) in
denominator. The ratio
should be fixed in such a manner so
that there will be no unnecessary
liquidity pressure on
the bank in any point of time.
Considering the regulatory liquidity
requirements (CRR and
SLR), the maximum value of the ratio
shall be derived using the formula
[ATDTL (100%)-CRRSLR].
Depending upon the capital base,
liquidity condition, NPL status etc. and
above all the
maintenance of LCR & NSFR, the board
may decide adding highest 4.5% and
2%* (for
conventional banks and Shariah based
banks respectively) with the result of
the above
formula to fix a suitable AD ratio.
WB covers call borrowing, Short Notice

Commitment Limit:

Structural Liquidity Profile

Deposit from banks and financial

institutions,
placement received with maturity less
than 12 months, commercial
papers/similar
instruments and overdrawn Nostroaccounts. The WB Limit should be
capped at 80% (for
Non PD banks) and 100% (for PD
banks) of bank's eligible capital on
fortnightly average basis
with maximum two deviations (not
more than 90% and 110% of the
eligible capital for Non
PD and PD banks respectively) in a
particular fortnight.
The commitment limit should be fixed
considering three important ratios.
These are: i) Total
commitments to total Assets, ii) Total
commitments to Total Eligible Capital
and iii) Total
commitments to total High Quality
Liquid Assets (HQLA). The highest
acceptable limits of
these ratios are less than 50%, less
than 500% and less than 250%
respectively. The
commitment limit should be the lowest
amount of the three ratios above.
The structural liquidity profile of a bank
provides information regarding
maturity
transformation of assets and liabilities
in a simple manner. The negative
liquidity GAP (if
exist), derived by considering assets
and liabilities both in local and foreign
currencies, may
Page 10 of 60

be taken as a preliminary signal for the

need of maturity adjustment of assets

Maximum Cumulative Outflow

(MCO):

Interest Rate Risk Limit

and liabilities
in different time buckets. The
Maximum Cumulative Outflow ratio
may be considered as an
important benchmark in this regard.
MCO reflects the maximum cumulative
outflow against total assets in a
maturity bucket.
MCO upto one month bucket should
not be greater than the sum of daily
minimum CRR plus
SLR. For example, at the present rate
of CRR and SLR, the MCO should be
19% (6% CRR+
13% SLR) for conventional banks. The
Shariah based banks, having higher
ADR and Short
nature of their investment are also
allowed MCO at the same ratio. MCO in
the other
maturity buckets should be prudently
fixed by the BODs (ALCO in case of
foreign banks)
depending on bank's business strategy.
The board should take utmost care in
setting these
ratios as they have significant impact
on bank's business strategy.
The BODs should set a limit on the
interest rate risk in the banking book.
The limit should be
set according to the risk appetite of
the bank. The BODs should also set the
management
action plan to reduce interest rate risk
if the situation warrants. Both NII (Net
Interest
Income) and MVE (Market Value of
Equity) Limits and action plan should
be set so that
management can act promptly. Bank
should follow the instruction of Risk

Swapped Funds Limit:

Management
Guidelines for Banks issued by
Bangladesh Bank in 2012.
Swapped fund is the difference
between assets and liabilities including
capital denominated
in the same currency.
Assets and liabilities will not always be
in the same currencies. A bank would
be exposed to
the risk that it may not meet its
currency-wise obligations as they fall
due. Swapped funds
position result from reliance on foreign
exchange markets and therefore needs
to be
controlled.
Swapped funds limits are established
on the maximum amount that may be
swapped out of
foreign currency into local currency
and swapped out of local currency into
foreign currency.

Maturity Profile Mismatch

To address this risk and to make sure a bank does not expose itself in excessive
mismatch, a bucket-wise (e.g. next day, 2-7 days, 7 days-1 month, 1-3 months, 3-6
months, 6 months-1 year, 1-2 year, 2-3 years, 3-4 years, 4-5 years, over 5 year)
maturity profile of the assets and liabilities is prepared to understand mismatch in every
bucket.
However, as most deposits and loans of a bank matures next day (call, savings, current,
overdraft etc.), bucket-wise assets and liabilities based on actual maturity reflects huge
mismatch; although we know that all of the shorter tenor assets and liabilities will not come in or
go out of the banks balance sheet. As a result, banks prepare a forecasted balance sheet
where the assets and liabilities of the nature of current, overdraft etc. are divided into core and
non-core balances, where core is defined as the portion that is expected to be stable and will
stay with the bank; and non-core to be less stable. The distribution of core and non-core is
determined through historical trend, customer behavior, statistical forecasts and managerial

judgment; the core balance can be put into over 1 year bucket whereas non-core can be in 2-7
days or 3 months bucket.

KEY CONCEPTS OF ALM

Balance Sheet Risk
Balance sheet risk can be categorized into two major types of significant risk, which are liquidity
and interest rate risks. Changes in market liquidity and or interest rates exposes banks/business
to the risk of loss, which may, in extreme cases, threaten the survival of institution. As such, it is
important that senior management should understand the existence of such risk on the balance
sheet and they should ensure that the structure of the institutions` business and the level of
balance sheet risk it assumes are effectively managed, that appropriate policies and procedures
are established to control and limit these risks, and that resources are available for evaluating
and controlling interest rate risk.

Liquidity Risk
Liquidity is a Banks ability to ensure the availability of funds to meet all on and off balance sheet
commitments as reasonable price at all times. Again liquidity risk is the current or prospective
risk to earnings and capital arising from a Banks inability to meet its liabilities when they
become due, without incurring unacceptable losses as well as from opportunity losses due over
liquidity relative to its liabilities.

Banks have ability to meet its liabilities as they become due can reduce the possibility of an
adverse situation developing. Liquidity shortfall in one institution can have repercussions on the
entire system affecting other derivatives interlinked with each other . Banks should measure not
only the liquidity requirements but also examine how liquidity requirement are likely to evolve
under crisis period. Banks are using Maturity ladder as standard tool for measuring net surplus /
deficit of fund at selected maturity dates. The maturity profile is used for measuring future cash
flows of Banks in different time buckets which are distributed as under: -

(i) Next day (ii) 2-7 days (iii) 7 days - 1 month (iv) 1 to 3 months (v) 3 to 6 months (vi) 6 months
- 1 year (vi) 1 year to 2 years (vii) 2-3 years (viii) 3-4 years (ix) 4- 5 years (x) Over 5 year
Within each time bucket there could be mismatches depending on Cash inflow/outflow. While
mismatch up to one year would be relevant since these provide early warning signal of
impending liquidity problems, the main focus would be on the short term mismatches viz 1-14

days and 15-28 days .Banks are however expected to monitor their cumulative mismatches
across all time buckets by establishing internal prudential limits with ALCO .The mismatch
(negative gap)during 1-14 days and 15-28 days in normal course may not exceed 20 percent of
cash outflows in each time -bucket .Big Banks with large branch network can afford to have
larger tolerance level in mismatches in the long run if their term deposit base is quite high .

Interest Rate Risk

Interest rate risk is the exposure of a bank's financial condition to adverse movements in
interest rates. Accepting this risk is a normal part of banking and can be an important source of
profitability and shareholder value. However, excessive interest rate risk can pose a significant
threat to a bank's earnings and capital base. Changes in interest rates affect a bank's earnings
by changing its net interest income and the level of other interest-sensitive income and
operating expenses. Changes in interest rates also affect the underlying value of the bank's
assets, liabilities and off-balance sheet instruments because the present value of future cash
flows (and in some cases, the cash flows themselves) changes when interest rates change.
Accordingly, an effective risk management process that maintains interest rate risk within
prudent levels is essential to the safety and soundness of banks.

ALCO - The Asset Liability Management Committee

To manage these risk factors in a systematic manner there is a committee in

the bank, known as ALCO.To Manage and monitor ALM risk, ALCO is headed by CEO &
Managing Director with the following executives :-

Constitution of the ALCO:

The CEO/Managing Director of the bank shall be the chairman of ALCO. Head of
Treasury
shall work as the member secretary of ALCO. The committee shall be
constituted as follows:
- Chief Executive Officer / Managing Director
- Head of Retail banking and/or General banking
- Head of Treasury
- Head of Corporate Banking
- Head of Finance/Chief Financial Officer/Head of Central accounts / Head of FAD
- Head of SME/International Division/Commercial Customers
- Chief Risk Officer
Conventional banks having Islamic banking business shall include the Head of
islamic
banking as a member of the ALCO committee. Banks having Off-shore Banking
shall also
include representative (as a member) from the Off-shore Banking Unit (OBU).
The head of
ALM desk should be a permanent invitee of the ALCO meeting. The Chairperson
of ALCO
may invite any other related person (maximum 2) in any meeting.

ALCO PAPER

An ALCO paper is produced every month (usually by Fund Management/Treasury

Department) which covers various issues related to Balance Sheet risk management. The
ALCO paper is prepared before the ALCO meeting as the committee reviews the ALCO paper to
set strategies. An ALCO paper typically covers the followings as per policy statement described
earlier.

a) Commentary : A brief summary on the following issues for the last month are provided for
review :

Combined as well as segmented ( Current , STD, Term etc.) Deposit Trend for local and
foreign currency.

Combined as well as segmented ( Overdraft, Term etc.) Advance Trend for local and
foreign currency.

Loan / Deposit Ratios.

Limit status and utilization.

b) Interest Rate Trend of the Market : Interest rate and yield curve for Treasury Bills, Overnight
funds, term money, competitive bank's published customer rates are included in the paper. A
yield curve is a graphic representation of the yields for a given financial instrument over a given
time period.

c) Balance sheet : A summarized or detailed version of the banks balance sheet for the current
and previous month will provide to understand the trend in assets and liabilities. This portion
also covers the variance in assets and liabilities against the target of the bank.

d) Key management Indicators (Limits and Utilisation) : The management of every bank sets
different limits in managing risk and exposures. The current limit of all indicators along with
recent utilization will be included for management review. Also trend for last few months are also
be included for better understanding of the behavior of the indicators. Some of the such key
management Indicators are mentioned in policy statement described earlier.

e) Liquidity Test for Contingencies: The major risk the bank is liquidity risk. Under any
circumstances the bank has to honor its commitments. As a result, it has to make sure that
enough liquidity is available to meet fund requirements in situations like liquidity crisis in the
market, policy changes by Bangladesh Bank. So, the bank's balance sheet should have enough
liquid assets for meeting contingencies. Liquid assets can be as follows:

Reserve Assets.
Cash in Tills (Balance with Bangladesh Bank).
Specific Government Securities/Treasury Bill.
Foreign Currency in open position.
Specific FDRs.

A liquidity contingency plan should be in place to ensure that the bank is prepared to
combat any crisis situation.

f) Interest Rate Profile : Apart from liquidity risk, a bank also runs interest rate risk, which is the
exposure of the bank's financial condition to adverse movements in interest rates. Accepting this

risk is a normal part of banking and can be an important source of profitability. However,
excessive interest rate risk can pose a significant threat to bank's earnings and capital base. To
address interest rate risk, an interest rate profile will be in each month prepared, where
consolidated yield for assets and liabilities for different maturity buckets are shown for better
understanding of interest profile.

Action Points

The ALCO will take decisions for implementation of any/ all of the
following issues:
Need for appropriate Deposit mobilization or Asset growth in right buckets
to optimize asset-liability mismatch.
Cash flow (long/short) plan based on market interest rates and liquidity.
Need for change in fund Transfer Pricing (FTP) &/or customer rates in line
with strategy adapted.
Address to the limits that are in breach (if any) or are in line of breach and
provide detailed plan to bring all limits under control.
Address to all regulatory issues that are under threat to non-compliance.

Implementation and Review of Strategies

All ALCO members are provided with the minutes of the meeting within the
next day. The minute includes:
The attendees.
The issues addressed.
The recommendations provided by the Chairman.
The action points that were fixed in the meeting.
The members will communicate the action points to their respective divisions
to implement the strategies undertaken.

Special ALCO Meeting

Apart from the regular monthly meeting, ALCO meeting is also called as and when any
contingent situations arise. A very good example may be, during the Eid period, changes in
SLR/CRR or any other important changes in liquidity imposed by Bangladesh Bank. At those
times, market liquidity dries out and overnight rates shoot up. Banks who are net borrowers from
the market may be exposed to huge interest expense the high rates in the market. This is an
ideal time for a special ALCO meeting, where the committee may take critical decisions.

Money Market Operations

Available funds are invested in money market through call money, Reverse
Repo, Purchase of Treasury bill / bonds and other Govt. approved securities.
Funds are also reserved in Bangladesh Bank in the form of SLR through
Treasury bill / bonds and other Govt. approved securities. Besides that CRR is
also maintained following the instructions of Bangladesh Bank. Surplus funds
are deposited in commercial banks / Non-Banking Financial Institutions in the
form of FDR's to activate the money market operation.
During Available surplus fund, following steps should be taken by Head Office
Treasury/Fund Management Department :a) Purchase Treasury bills.
b) Reverse repo with Bangladesh Bank.
c) Inter bank reverse repo.
d) Invest fund in the form of call money.
e) Discourage deposit at a higher rate of interest.

During shortfall of fund, following steps are usually taken by the authority :a) Mobilization of deposit by offering prime rate.
b) Discourage sanction of new loans in less priority sectors.
c) Crush programme are taken for recovery of bad loans and advances.

Asset Liability Management Strategy:

A shortcoming of scenario analysis is the fact that it is dependent on the choice

of scenarios. It also requires that many assumptions be made about how specific
assets or liabilities will perform under specific scenarios.
The largest component of a bank's earnings is driven by what we call core banking
operations - the business of borrowing and lending money. Depending on how the bank's
franchise adds value, this head may represent as much as 60% - 80% of the total earnings
generated by the bank.
Under this head banks make money by borrowing in the short term (through daily, weekly
and monthly deposits or interbank borrowing) and lending it out for the long term (via fixed
maturity loans to business customers, revolving balances on credit cards or short term
personal loans, longer terms auto and mortgage loans to individual customers.)
Since there is a clear difference in rates (the spread) between long term (higher) and short
term rates (lower), such a strategy allows a bank to earn an interest rate spread. The source
of the spread is the intentional maturity mismatch between assets and liabilities.
As interest rate change over a period of time, the interest rate spread widens (increases) or
tightens (decreases). Even with little volatility in rates, spreads can still change significantly
if interest rates move in different directions for assets and liabilities or across maturity
tenors and buckets.

Changes in interest rate spread have a direct and significant impact on bank earnings.
Which is the reason why bank boards, regulators and industry analysts are interested in
financial disclosures that clearly show earning sensitivity to expected interest rate changes
in the near term. Combined with an interest rate outlook for the next few quarters, most
boards can get an indication of earnings direction and use that to manage analyst and

shareholder expectations.
Over the years the industry has fine tuned the usage of reporting tools that focus on the
impact of interest rate changes on earnings. While Asset Liability Management (ALM) has a
much broader mandate, earning sensitivity reporting is now a core part of the monthly ALM
discussion during executive committee meetings.

Techniques for assessing asset-liability risk came to include gap analysis and
duration analysis. These facilitated gap management and duration matching of
assets and liabilities. Both approaches worked well if assets and liabilities
comprised fixed cash flows. Options, such as those embedded in mortgagesbacked securities or callable debt, posed problems that gap analysis could not
address. Duration analysis could address these in theory, but implementing
sufficiently sophisticated duration measures was problematic. Accordingly,
banks andINSURANCE COMPANIES also performed scenario analysis.
With scenario analysis, several interest rate scenarios would be specified for the
next 5 or 10 years. These might assume declining rates, rising rates, a gradual
decrease in rates followed by a sudden rise, etc. Scenarios might specify the
behavior of the entire yield curve, so there could be scenarios with flattening
yield curves, inverted yield curves, etc. Ten or twenty scenarios might be
specified in all. Next, assumptions would be made about the performance of
assets and liabilities under each scenario. Assumptions might include
prepayment rates on mortgages or surrender rates onINSURANCE products.
Assumptions might also be made about the firms performancethe rates at
which new business would be acquired for various products. Based upon these
assumptions, the performance of the firms balance sheet could be projected
under each scenario. If projected performance was poor under specific
scenarios, the asset-liability management committee might adjust assets or
liabilities to address the indicated exposure.
Finishing with a small case:
MediumBankwasfoundedinMoscow,Russiain1993.Theywerenotveryactiveuntil1998butnowtheyare
closetothe150thplaceinRussianbanksranking.Inthepastfewyearsthemacroeconomicenvironmenthasbeen
favorablefortheRussianbankingsystemandbankshavebenefitedfromthestrongeconomicgrowth,political
stabilityandfundsinflowintothecountry.Thebankoperatesin30branchesandoutletsinSt.Petersburgand
MoscowandhasplanstoattractaforeignstrategicinvestortoenteritscapitaltogetpositiveeffectontheBanks

internationalratings,levelofcorporategovernanceandfundingcosts.
The bank is a dynamically developing mediumsized commercial bank with total assets of RUR 10 billion,
shareholdersequityofRUR0.6billion,loanportfolioofRUR7billionandtotalcustomerdepositsofRUR6,5
billionasofDecember31,2006basedonauditedfinancialstatementspreparedinaccordancewithIFRS.The
mainproductsofthebankaremortgageandconsumerloans.
NowtheBanksstrategyisfocusedontheretailsectorandlendingtosmallandmediumsizedenterprises.To
bettermanagethebalancesheetthebankhasdecidedtostartdevelopingasoundA/LRiskmanagementsystem.
TheyhaveabasicALMsystem,buttheyonlysendreporttotheCBRaboutthematuritygapandliquidityratios.
TheyproducematurityandtherepricinggapandcalculateratiosaccordingtotheIFRSrequirements.
Thegloballiquidityconditionshaveadverselyaffectedthebankabilitytotapthemarkets.Thebankiscurrently
facingrefinancingriskduetothebulkyrepayments.Overall,Russianbankingsectorliquidityisveryvulnerable
and the situation is aggravated by the nature of retail term deposits, substantial funding concentrations and
generallylowinterbankanddepositorconfidence.ThusemployingquantitativemodelsformanagingALMrisks
arewelltimedandappropriatetothebankneeds.