Bank Asset and Liability Management is an art which is every bit old as banking itself. It a basis of fiscal market hazard direction. Banks and other fiscal establishments are in the hazard taking concern. They use their hazard expertness in hazard rating, which involves really sophisticated instruments, to bring forth optimal degree of returns. The types of hazard exposure taken on can be elusive & amp ; complex, non merely the single merchandise themselves, but besides interacting with external market factors. While accessing the hazard exposure, it is of import sing the Balance sheet as a whole.
Bank plus and liability direction can be defined as:
“ The pattern of fiting the term construction and hard currency flows of an administration ‘s plus and liability portfolios to maximize returns and minimise hazard ”
The chief aim of Asset and Liability direction is to pull off the involvement rate hazard and its correlative hazards, with the aim of maximizing growing or sustainability.
Banks usually have a commission which usually comprise of senior direction of a bank, including the caput of divisions and other specializers, which makes of import determinations of a bank related to its balance sheet. This commission is called as Asset & A ; Liability Committee ( ALCO ) . It is a hazard direction commission. It usually meets one time a month at least to analyze, reappraisal and formulate scheme to pull off balance sheet.
The ALM direction construction is as follows
Assetss and liabilities of a bank are monitored through ALCO. The undermentioned chart shows the flow of information in a bank ‘s Asset and Liability commission
In every ALCO meeting, the cardinal points of treatment are noted and action points are highlighted for bettering the balance sheet of the bank. In the following ALCO meeting, the action points are reviewed to guarantee execution.
Key functions and maps of ALCO vary for every bank. It is sometimes responsible for general direction policy. It ‘s chief maps are:
Review studies on different hazards including recognition hazard, involvement rate hazard and capital direction covered in the study ;
Identify balance sheet direction issues like balance sheet spreads, involvement rate spread, that lead to under public presentation ;
Review the ratios of interest-rate-sensitive assets to liabilities ;
Review adulthood distribution of liquidness book ;
Review current liquidness place and expected liquidness place in short and average term ;
Current involvement rates on loans and sedimentations to do certain that these are in conformity with overall loaning and support scheme ( sedimentation pricing scheme ) ;
To specify transportation pricing policy of a bank ; and
“ what if ” , prove scenarios to look into for the alterations in market conditions and its effects on banking book and scene of hazard tolerance.
Balance sheet hazard direction:
ALCO plays an of import function in the direction of Balance sheet hazard direction.
It reviews the actions taken in old meeting ;
Liquidity hazards related to equilibrate sheet ;
Economic conditions & A ; market mentality ;
Review the cost & A ; involvement rate construction ; & A ;
Actions to be taken.
Capital Structure:
ALCO commission keeps a closer expression at company ‘s capital construction and makes certain that all the regulative demands are complied with. It makes certain that company is good capitalised and meets the demands of BASEL I & A ; II and maintains entire hazard based capital ratio, tier1 hazard based capital ratio and tier1 purchase ratio.
Gap:
GAP is the difference between rate sensitive assets RSA and rate sensitive Liabilities RSL. ALCO measures the bank spread and involvement rate exposure. Gap studies are used to mensurate the hazards to net involvement originating from re-pricing of assets and liabilities.
When RSA – RSL & gt ; 0, the bank is said to hold a positive GAP ;
When RSA – RSL & lt ; 0, the bank is said to hold negative GAP ; & A ;
Where RSA- RSL = 0, the bank is said to hold no GAP.
Liquidity & A ; Support:
Another of import map of ALCO is to do certain that the bank has sufficient liquid resources to run into the demands of its clients. It besides keeps an oculus on variegation, cost hardiness of support beginnings and current and new support construction.
Summary of ALCO ‘s chief mission:
Mission
Components
ALCO direction & A ; Reporting
Explicating ALM scheme
Management Coverage
ALCO Agenda & A ; Minutess
Measuring liquidness, spread & A ; involvement Rate hazard studies
Scenario Planning & A ; Analysis
Interest Income Projection
Asset Management
Pull offing bank liquidness book ( Cadmiums, Bills )
Pull offing the FRN book
Investing Bank Capital
ALM scheme
Output Curve Analysis
Money Market Trading
Funding & A ; liquidness Management
Liquid policy
Pull offing Liquidity & A ; support Hazard
Guaranting Funding variegation
Pull offing Lending of financess
Hazard Management
Explicating Hedge policy
Interest rate hazard exposure direction
Implementing hedge policy utilizing hard currency & A ; derivative instruments
Internal Treasury Function
Explicating transportation pricing system and degree support group entities
Calculating the cost of capital