Submitted to:- Amruta Mam.

 ALM is the process involving decision making about the

composition of assets and liabilities including off balance sheet items of the bank conducting the risk assessment. Asset Liability Management is concerned with strategic balance sheet management involving risks caused by changes in interest rates, exchange rate, credit risk and the liquidity position of bank. With profit becoming a key-factor. ALM is required to match assets & liabilities and minimize liquidity as well as market risk.

ALM is concerned with strategic management of Balance Sheet by giving due weightage to market risks viz. Liquidity Risk, Interest Rate Risk & Currency Risk. ALM function involves planning, directing, controlling the flow, level, mix, cost and yield of funds of the bank ALM builds up Assets and Liabilities of the bank based on the concept of Net Interest Income (NII) or Net Interest Margin (NIM).

Purpose and objectives of asset liability management

Review the interest rate structure and compare the same to the interest/product pricing of both assets and liabilities. Examine the loan and investment portfolios in the light of

the foreign exchange risk and liquidity risk that might arise.

LIQUIDITY MANAGEMENT

INTEREST RATE RISK MANAGEMENT

Management of Exchange Rate Risk

 Banks need liquidity to meet deposit

withdrawal and to fund loan demands. The variability of loan demands and variability of deposits determine banks liquidity needs.It represents the ability to accommodate decreases in liability and to fund increases in assets. It demonstrates the market place that the bank is safe and therefore capable of repaying its borrowings.

Conti....
It enables bank to meet its prior loan commitments, whether formal or informal. It enables bank to avoid the unprofitable sale of assets. It lowers the size of the default risk premium the bank must pay for funds.

Types of liquidity risk:

A. Funding Risk B. Time Risk C. Call Risk.

Objective of liquidity management

Ensure profitability Ensure liquidity

Banks need liquidity to

Meet deposit withdrawal Fund loan demands

Interest rate risk is the volatility in net interest

income(NII) or in variations in net interest margin(NIM). Gap: The gap is the difference between the amount of assets and liabilities on which the interest rates are reset during a given period. Basis risk: The risk that the interest rate of different assets and liabilities may change in different magnitudes is called basis risk. Embedded option: Prepayment of loans and bonds and/or premature withdrawal of deposits before their stated maturity dates.

Conti....
Price Risk
When Interest Rates Rise, the Market Value

of the Bond or Asset Falls

Reinvestment Risk

When Interest Rates Fall, the Coupon Payments on the Bond are Reinvested at Lower Rates

Foreign exchange Risk- Risk arising out of

adverse exchange rate movements during a period in which it has open position in an individual foreign currency. Transaction exposure- Change in the foreign exchange rate between the time the transaction is executed and the time it is settled. Forwards- Agreement to buy or sell for a predetermined amount, at a predetermined rate on a predetermined date.

Conti....
Open position:
The extent to which outstanding contracts to purchase a currency exceed liabilities plus outstanding contracts to sell the currency & vice versa. position- A limit on the maximum open position left overnight, in all major currencies.
position in all major currencies at any point of time during day. Such limits are generally larger than overnight positions.

Overnight Day-light

position- A limit on maximum open

ALM & BALANACE SHEET OF BANK

Building an ALM policy-

SUCCESS OF ALM IN BANKS PRE - CONDITIONS

Awareness for ALM in the Bank staff at all levels

supportive Management & dedicated Teams. Method of reporting data from Branches/ other Departments. (Strong MIS). Computerization - Full computerization, networking. Insight into the banking operations, economic forecasting, computerization, investment, credit. Linking up ALM to future Risk Management Strategies.

Outcomes-

ALM is decreasing the market risk, operational risk, credit risk and other risk which are affected the Banking System.

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