ATM

Assets Liability Management

It is a dynamic process of Planning, Organizing & Controlling of Assets & Liabilities- their volumes, mixes, maturities, yields and costs in order to maintain liquidity and NII.

Significance of ALM
Volatility Product Innovations & Complexities Regulatory Environment Management Recognition

Purpose & Objective of ALM

An effective Asset Liability Management Technique aims to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole so as to attain a predetermined acceptable risk/reward ration. It is aimed to stabilize short-term profits, longterm earnings and long-term substance of the bank. The parameters for stabilizing ALM system are: 1. Net Interest Income (NII) 2. Net Interest Margin (NIM) 3. Economic Equity Ratio

RBI DIRECTIVES
Issued draft guidelines on 10th Sept98.

Final guidelines issued on 10th Feb99 for implementation of ALM w.e.f. 01.04.99.
To begin with 60% of asset &liabilities will be covered; 100% from 01.04.2000. Initially Gap Analysis to be applied in the first stage of implementation. Disclosure to Balance Sheet on maturity pattern on Deposits, Borrowings, Investment & Advances w.e.f. 31.03.01

INTRODUCTION
Asset liability management (ALM)
interest rate risk: The interest-rate risk arises from the possibility that profits will change if interest rates change. liquidity risk: The liquidity risk arises from the possibility of losses due in the bank having insufficient cash on hand to pay customers. Both risks are due to the difference between the bank's assets and liabilities.

 The best illustration of ALM : U.S. savings and loan (S&L) crisis
Savings and loan banks: retail banks, receive retail deposits and make retail loans For many years, interest rates stable. Deposits for around 4% (floating rate), and they lent 30-year mortgages paying about 8% at fixed rates. Then in the 1980s, the Federal Reserve allowed interest rates to float. Short-term interest rates rose to 16%. Many deposit customers withdrew their funds or demanded the higher rates The rate of mortgages is fixed with 8%, however the rate of deposits is floating and the banks have to pay 16% to deposit customers This causes the banks a lot of loss and go to bankrupt

 Several keys of the above example

The rate of deposit is floating and the rate of mortgage is fixed The deposit (loan) is more (less) sensitive to interest rate Or, the deposits (one kind of banks liabilities) is rate-sensitive and the mortgage (one kind of banks assets) is rate-insensitive. The interest rate risks will rise when the RSL (rate-sensitive liabilities) is not equal to RSA (rate-sensitive assets) How to evaluate the size to rate sensitivity?