Search your Topic HERE....

January 08, 2013

Shortnotes on ALM (Asset Liability Management) - Banking Basics for SBI and IBPS Common Written Exams and Interviews

1 comment

sponsored links

Friends, here is a detailed shortnotes on the strategic management tool of Banking Industry, ALM  (Asset Liability Management). This will helpful for you for your upcoming IBPS and RBI Exams. Happy Reading.
What is ALM ?
The full form of ALM is Asset Liability Management. This is the process of managing risks that arise due to mismatches between the assets and liabilities (debts and assets in simple words) of the bank.

Here goes the technical definition of ALM.
The ALM is a comprehensive and dynamic framework for measuring, monitoring and managing the market risk of a bank. It is the management of structure of balance sheet (liabilities and assets) in such a way that the net earning from interest is maximized within the overall risk-preference (present and future) of the institutions.

Scope of ALM
The ALM functions extend to liquidly risk management, management of market risk, trading risk management, funding and capital planning and profit planning and growth projection.

Residual maturity
Residual maturity is the time period which a particular asset or liability will still take to mature i.e. become due for payment (once at a time, say in case of a term deposit or in instalments, say in case of term loan).

Maturity Buckets
Maturity buckets are different time intervals (8 for the time being, namely 1-14 days, 15-28, 29-90, 91-180, 181-365 days, 1-3 years, 3-5 and above 5 years), in which the value of a particular asset or liability is placed depending upon its residual maturity.

Mismatch position
When in a particular maturity bucket, the amount of maturing liabilities or assets does not match, such position is called a mismatch position, which creates liquidity surplus or liquidity crunch position and depending upon the interest rate movement, such situation may turnout to be risky for the bank. The mismatches for cash flows for 1-14 days and 15-28 days’ buckets are to be kept to the minimum (not to exceed 20% each of cash outflows for those buckets).

Role of ALCO
Asset-Liability Committee is the top most committee to oversee implementation of ALM system, to be headed by CMD or ED. ALCO would consider product pricing for both deposits and advances, the desired maturity profile of the incremental assets and liabilities in addition to monitoring the risk levels of the bank. It will have to articulate current interest rates view of the bank and base its decisions for future business strategy on this view.

Benefits of ALM
As we've discussed above, ALM is a tool that enables bank managements to take business decisions in a more informed framework with an eye on the risks that bank is exposed to. It is an integrated approach to financial management, requiring simultaneous decisions about the types of amounts of financial assets and liabilities - both mix and volume - with the complexities of the financial markets in which the institution operates.

Thats all for now friends. In our next post, we shall discuss some more important points for bank interviews. All The Best.

Liked this post? Read more Here 

IBPS PO Clerk Common Interview preparation 2013 | SBI Interview tips 2013 | IBPS RRB Interview guide

1 comment:

  1. Ma'm What does Liability mean actually??
    and what are assets and liabilities of bank??
    Its a question asked in interview...Please tell me the answer


Related Posts Plugin for WordPress, Blogger...