Bank’s Assets and Liability
Management
Lecturer: Leyli Malikova
•The basics of asset–liability
management
•The main management concerns
on the balance sheet
•The features of the most
common off-balance sheet (OBS)
transactions
•The main off-balance
sheet management
concerns
•Loan sales and the
process of
securitization
Introduction to balance sheet structure
Traditionally, the business of banks is to intermediate funds between surplus units
and deficit units thereby linking depositors with borrowers. Banks also provide
pooling of risk, liquidity services and undertake delegated monitoring. Financial
Lecture
intermediaries can be classified according to their 4. Bank’s Assets and
different
balance sheet structures. Liability Management
Lecturer:of
For deposit-taking institutions, the main source Leyli Malikova(customer deposits) are
funding
reported on the liabilities side of the balance sheet, while the allocation of these
funds (cash, loans, investments, and fixed assets) is detailed on the assets side.
Banks’ profits are derived from the income statement (profit and loss account),
a document that reports data on costs and revenues and measures bank performance
over two balance sheet periods.
Introduction to balance sheet structure
The balance sheet is a financial statement of the wealth of a business or
other organization on a given date. This is usually at the end of the financial
year. For commercial banks the balance sheet lists all the stock values of
sources and uses of banks’ funds. Banks’ funds come
Lecture from: Assets and
4. Bank’s
Liability Management
a) the general public (retail deposits);
Lecturer: Leyli Malikova
b) companies (small, medium, and large corporate deposits);
c) other banks (interbank deposits);
d) equity issues (share issues, conferring ownership rights on holders);
e) debt issues (bond issues and loans); and
f) saving past profits (retained earnings).
The above is generally classified as banks’ liabilities (debt) and capital (equity).
Introduction to balance sheet structure
These funds are then transformed into financial and, to a lesser
extent, real assets:
a) cash;
b) liquid assets (securities); Lecture 4. Bank’s Assets and
Liability Management
c) short-term money market instruments such as Treasury bills,
which banks can sell (liquidate) quickly
Lecturer: if they have a cash
Leyli Malikova
shortage;
d) loans;
e) other investments; and
f) fixed assets (branch network, computers, premises).
Introduction to balance sheet structure
Banks liabilities (e.g., retail deposits) tend to have shorter maturities than
assets (e.g., mortgage loans). This mismatch derives from the different
requirements of depositors and borrowers: typically the majority of depositors
want to lend their assets for short periods of time and
Lecture for the highest
4. Bank’s Assetspossible
and
return. In contrast, the majority of borrowers require
Liability loans that are cheap and
Management
for long periods.
The asset transformation function of Lecturer:
banks Leyli Malikova
is derived from these
characteristics. To recap, banks have the primary function of being asset
transformers because they intermediate between depositors and borrowers by
changing the characteristics of their liabilities as they move from one side of
the balance sheet to the other. Capital is sometimes referred to as equity
capital or net worth and is equal to the difference between assets and
liabilities.
Asset – Liability management
Asset Liability can be defined as a mechanism to address
the risk faced by a bank due to mismatch between assets and
liabilities either due to liquidity or change in interest rates.
ALM policy framework focuses on bank profitability and
long term viability.
Maturity matching of assets and liabilities across various
time horizons.
Asset – Liability management
•ALM aims to manage the volume, mix, maturity, rate sensitivity,
quality and liquidity of assets and liabilities as a whole so as to
attain predetermined acceptable risk/reward ratio.
• It is aimed to stabilize short-term profits, long-term earnings
and long-term substance of the bank. The parameters for
stabilizing ALM system are:
Net Interest Income (NII)
Net Interest Margin (NIM)
Economic Equity Ratio
•ALM
Net aims
interest to manage
income (NII) the volume,
is the difference mix,
between maturity,
revenues generatedrate sensitivity,
by interest-
bearing assets and the cost of servicing (interest-burdened) liabilities. For banks, the
quality and liquidity of assets and liabilities as a whole so as to
assets typically include commercial and personal loans, mortgages, construction loans and
attain predetermined
investment securities. acceptable risk/reward ratio.
• It
Net is aimed
interest to stabilize
margin (NIM) short-term
is a measurement comparing profits, long-term
the net interest earnings
income a financial firm
and from
generates long-term substance
credit products of the with
like loans and mortgages, bank. The interest
the outgoing parameters for
it pays holders
of savings accounts and certificates of deposit (CDs). Expressed as a percentage, the NIM is a
stabilizing
profitability indicatorALM system the
that approximates are:
likelihood of a bank or investment firm thriving over
the long haul. Net Interest Income (NII)
The equity ratio is a financial
Netratio indicating
Interest Marginthe relative
(NIM)proportion of equity used to
finance a company's assets. The two components are often taken from the firm's balance
Economic
sheet or statement of financial Equitybook
position (so-called Ratiovalue), but the ratio may also be
calculated using market values for both, if the company's equities are publicly traded.
Commercial Bank
1 2 3
Assets Liabilities Equity
Commercial balance sheet
(simplified)
Assets Liabilities
Cash Deposits: retail
Liquid assets Deposits: wholesale
Loans
Other investments Equity
Fixed assets Other capital terms
Total assets Total liabilities and equity
Examples of balance sheet
Liquidity Risk Management.
Interest Rate Risk Management.
Currency Risks Management.
Profit Planning and Growth
Projection.
ALM Process
Risk Parameters
Risk Identification
Risk Measurement
Risk Management
Risk Policies and
Tolerance Level
ROE is calculated
as net income/total equity
and can be decomposed
into two parts:
the ROA
(= net income/total assets),
that measures average
profit generated relative to
the
bank’s assets
and the Equity Multiplier
(EM = assets/equity),
so that ROE = ROA ×
EM.
Thank you
