Banking institutions, which actively manage their risks, have a decisive competitive advantage. Asset Liability Management (ALM) is a major component of the overall risk management of an institution and typically focuses on financial risks. A working definition of ALM, “Asset-Liability Management is the ongoing process of formulating, implementing, monitoring, and revising strategies related to assets and liabilities in an attempt to achieve financial objectives for a given set of risk tolerances and constraints.” It covers the set of techniques used to manage interest rate and liquidity risks. It deals with the structure of the Balance Sheet subject to the given constraints - internal, external and regulatory. ALM policies are intended to keep liquidity and interest rate risks at an acceptable level given expectation of future interest rates. Liquidity and interest rate policies are interdependent since any projected liquidity gap will be funded at an unknown rate.
Introduction
The reform measures heralded several epoch making changes in the financial sector to make them more competitive. It includes deregulation of interest rates, reduction of reserve requirements (CRR and SLR), integration of various segment of financial markets, allowing banks to access capital market for augmenting capital base to meet their capital adequacy, freedom in operational matters, greater emphasis on the use of information technology, moving towards capital account convertibility and so on. These measures emphasise on internal consolidation of banks and covers organisational restructuring to match with competitive environment Among the important aspects of such re-engineering are Asset Liability Management (ALM), The aim of these ALM strategies is to improve efficiency by improving net interest margin(NIM) in short run and market value of equity(MVE) in long run.
Objective
The course would provide understanding of Measurement and Management of Liquidity, Interest rate risk & Choosing assets and liabilities, which result in the highest expected return on equity. This course will address the different approaches for Value at Risk (VaR) in detail combining both asset and liability products. The objectives of ALM in Banks are to familiarize the students
• TO MANAGE THE LIQUIDITY OF A BANK EFFICIENTLY – Through the Outflow /Inflow of the existing liability / asset – Creation of New Business • TO MANAGE THE INTEREST RATE RISK – BY PROTECTING NII / NIM (SHORT TERM GOAL) • TO IMPROVE THE NETWORTH OF A BANK (LONG TERM GOAL) – Compute Market Value of Equity (MVE) – Compute Economic Value Addition (EVA) • Deposit and Loan Pricing • Securitization • Valuation of Banks • The students will get an opportunity to work through business case scenario and gain hands-on experience of best practice risk analysis techniques. They will also latest best practice risk analysis techniques and strategies.
Student Learning Outcomes
ü Be able to Identify the Liquidity Risk and Interest Risk from the Balance Sheet of Bank ü Be able to Price the Loan ü Be able to calculate valuation of Bank ü Be able to project the Balance sheet of Bank Achievement of Program Learning Objectives ü Students will able to understand the earning perspective of Bank. ü Students will able to handle the economic value perspective of Bank ü Students will able to assess the Banks’s profitability in both best case and worst case scenarios