A better way: leveraging the Live approach The Live approach can solve the problem of integrating Agile development teams into a broader corporate infrastructure by providing developers with live access to corporate information via the tools they need. What to read next: Myths and misconceptions about Agile software development November 29, While traditional waterfall software development principles are generally considered the least risky, Agile methods have proven their ability to improve….
Three Agile methods explained and the secret to… November 30, Now that we're familiar with some common Agile myths, we can learn more about some Agile development methodologies and how…. What is the Live approach to software development? Leave a Reply Cancel reply You must be logged in to post a comment. Siemens Digital Industries Software. Fundamentally, when a bank has both assets and liabilities, in the course of business, ultimately the banks have to meet commitment on their liabilities, which are sourcing their assets.
Many a time two different situations may arise. Assets with a particular maturity may be greater than the liabilities of the same maturity and vice versa. To avoid this financial quagmire, banks require advanced and meticulous financial planning, and in this context, ALM is invaluable. The basic objective of ALM is to enforce the risk management discipline viz.
Today, with an increase in demand for funds, there is a remarkable shift in the features of assets and liabilities of banks. Moreover, intense competition coupled with increasing volatility in the interest rates has prompted the management of banks to strike a balance among spreads, profitability and long-term viability. Therefore, it is imperative for banks to match the maturities of assets and liabilities.
Thus, banks in Nepal have started recognizing the importance of Asset Liability Management. ALCO is responsible for deciding the risk management policy of the bank and set guidelines for liquidity, interest rate, foreign exchange and equity price risks. The management involve ALCO in balance sheet planning from the risk-return perspective.
It is also involved in product pricing for both deposits and advances, desired maturity profile of the incremental assets and liabilities, etc. The ALCO would also articulate the current interest rate view of the bank and base its decisions for future business strategy. For instance, it aids in developing a view on future direction of interest rate movements and decide on a funding mix between fixed vs. Individual banks would decide the frequency for holding their ALCO meetings.
Gap analysis is a technique of asset-liability management used to assess interest rate risk or liquidity risk. This technique is widely adopted by financial institutions these days. When used to manage interest rate risk, it was used in tandem with duration analysis. Both techniques have their own strengths and weaknesses.
Duration is appealing because it summarizes, with a single number, exposure to parallel shifts in the term structure of interest rates. It does not address exposure to other term structure movements, such as tilts or bends. Gap analysis is more cumbersome and less widely applicable, but it assesses exposure to a greater variety of term structure movements. Liquidity risk refers to the risk of the bank being unable to meet any of its obligations either by being unable to continue to obtain funds to meet any of its commitments or having to pay a substantial premium to do so.
In the commercial environment, retaining the confidence of lenders and depositors will increasingly rely on the maintenance of capital adequacy at or above the prescribed levels, financial ratios that indicate viability and sustainability and generate confidence in the market that the institution is able to manage its exposures and all of the associated risks.
The structure shows that in three months, the Bank will receive cash from maturing assets for NRs 68, million. However, in three months, the Bank has maturing liabilities of NRs 45, million and needs cash liquidity to make the repayment. This results in liquidity surplus of NRs. However, in next three months, the Bank will have liquidity gap of NRs.
Surplus of earlier period could meet this gap. Earlier surplus could not meet the gap in one year period. So, it was important to launch ALM guidelines so that banks can remain safe from big losses due to wide ALM mismatches.
These guidelines were effective from 1st April, These guidelines enclosed, inter alia, interest rate risk and liquidity risk measurement, broadcasting layout and prudential limits. Gap statements were necessary to be made by scheduling all assets and liabilities according to the stated or anticipated re-pricing date or maturity date. On the basis of the remaining intervals to their maturity which are also referred as residual maturity, all the liability records were to be studied as outflows while the asset records were to be studied as inflows.
According to the prescribed guidelines, in the normal course, the mismatches also known as the negative gap in the time buckets of days and days were not to cross 20 per cent of the cash outflows with respect to the time buckets. This was in September , in response to the international exercises and to satisfy the requirement for a sharper evaluation of the efficacy of liquidity management and with a view to supplying a stimulus for improvement of the term-money market.
The RBI fine-tuned these regulations and it was ensured that the banks shall accept a more granular strategy for the measurement of liquidity risk by dividing the first time bucket that is of days currently in the Statement of Structural Liquidity into three time buckets. They are 1 day addressed next day, days and days. Hence, banks were demanded to put their maturing asset and liabilities in 10 time buckets.
These deposits were relatively stable and also inelastic to the growth in demand for funds. In the eighties the business expansion was across boundaries. In India the banks which were working in a protected environment were exposed to the vagaries to the market forces. Competition from foreign players, interest rate de-regulation, lesser protection from the government. Until now when the focus was on either asset side or the liability side.
The changes in the environment made management of assets and liability a coordinated process. I know it takes time to understand concepts and at the same time it is quite difficult to explain a concept in a simple manner. I have aimed to be as simple as possible to take you thru ALM and its evolution. Hope you liked it. Please let me know your views. Thank you so much, it seems like you blog is the only one covering ALM for banks in detail. I appreciate it, thank you for giving me the chance to get smarter!
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