CAIIB RISK MANAGEMENT PDF

The management Committee or any specific committee of the board should oversee the implementation of the systems and review of its functioning periodically. ALM involves assessment of various types of risks and altering the asset liability portfolio in a dynamic way in order to manage risks. ALM information systems consists of Management information system, Information availability, accuracy, adequacy and expedience. ALM organization consists of Structure and responsibilities. ALM process consists of Risk parameters, Risk identification, Risk measurement, Risk management and Risk policies and tolerance levels.

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The management Committee or any specific committee of the board should oversee the implementation of the systems and review of its functioning periodically.

ALM involves assessment of various types of risks and altering the asset liability portfolio in a dynamic way in order to manage risks. ALM information systems consists of Management information system, Information availability, accuracy, adequacy and expedience. ALM organization consists of Structure and responsibilities.

ALM process consists of Risk parameters, Risk identification, Risk measurement, Risk management and Risk policies and tolerance levels. Information is the key to the ALM process. The successful implementation of risk management requires strong commitment of senior management. The board should set limits for liquidity, interest rate, foreign exchange and equity price risks. ALCO should be responsible for ensuring adherence to the limits set by the board as well as for deciding business strategy of the bank in line with budget.

ALCO is an decision making unit responsible for Balance Sheet planning from risk return prospective including the strategic management of interest rate and liquidity risks. The maturity profile could be used for measuring future cash flows of the bank in different time buckets. Mismatches upto one year provide early signals of impending liquidity problems. Statement of structural liquidity may be prepared by placing all cash inflows and outflows in the maturity ladder.

Dealing in different currencies brings opportunities and also risks. The simplest way to avoid currency risk is to ensure that mismatches, if any are reduced to zero or near zero. The GAP or mismatch risk can be measured by calculating gaps over different time intervals as at a given date. Reasons for growing significance of ALM are: 1. Volatility due to deregulation of financial system, interest rates and price level.

Requirement under the Regulatory Environment 4. Increasing awareness among the Top Management.. Contingent Liabilities includes 1 Claims against the bank not acknowledged as debts, liability for partly paid investments, liability on forward exchange contracts and other items like arrears of cumulative dividends, bills rediscounted, underwriting, Commitments, estimated amount of contracts remaining to be executed on capital account and not provided for etc.

Important functions of effective liquidity management 1 Demonstrates that the bank is safe and capable of repaying its borrowings 2 Enables to meet prior loan commitments 3 Avoids the un profitable sale of assets and 4 Lowers the payment of default risk premium for funds.

The factors that affect liquidity : 1 Decline in earnings 2 Increase in NPA 3 Deposit concentrations 4 Down grading by rating agencies 5 Expanded business opportunities 6 Acquisitions and 7 New tax initiatives. To satisfy the funding needs, we can 1 Dispose off liquid assets 2 Increase short term borrowings 3 Decrease holdings of less liquid assets 4 Increase liabilities of a term nature and 5 Increase capital funds.

Business in multiple currency adds a lager complexity because the Foreign Liability holders may not be able to distinguish between rumors and facts and business may not always be able to mobilize domestic liquidity to meet Foreign Currency funding requirements. Tolerance level or limit for liquidity risk can be set on 1 The cumulative cash flow mismatches 2 Percentage of liquid assets to short term liabilities 3 A limit on loan to deposit ratio 4 a limit on loan to capital ratio 5 a general limit on funding needs and available sources 6 Primary source for meeting funding needs should be qualified 7 Flexible limits on the percentage of relieve pm a particular liability category and 8 Limit on dependence on individual customers.

Stock Approach consists of: 1 Ratio of Core deposits to total assets 2 Ratio of time deposits to total deposits. Maturity or re-pricing schedules are those which distributes interest sensitive assets, liabilities and OBS positions into a certain number of predefined time bands according to their maturity or re-pricing. Gap Analysis: Under Gap Analysis, to evaluate the earnings exposure, interest rate sensitive liabilities in each time band are subtracted from the corresponding interest rate sensitive assets to produce a re-pricing gap for that time band.

This gap can be multiplied by an assured change in interest rates to yield on approximation of the change in net interest income that would result from such an interest rate movement. The size of interest rate movement used in the analysis can be based on a variety of factors including historical experience simulation of potential future interest rate movements and the Judgement of bank management.

Liability sensitivity can be reduced by A Reducing investment portfolio B Increasing floating rate lending C Increasing long term deposits D Increasing short term lending 6. D Maturity mismatch is accentuated by proliferation of performing assets NPAs And long re-negotiations, sound lending policies and effective post sanction monitoring and recovery steps can contain the volume of NPAs.

An effective system of internal control for interest rate risk includes: A A strong control environment B An adequate process for identifying and evaluating risk C The establishment of control activities such as policies procedures and methodologies D Continual review of adherence to established policies and procedures.

Basic elements in management of assets, liabilities and OBS instruments are: A Appropriate board and senior management over sight. B Adequate Risk management policies and procedures.

C Appropriate risk measurement monitoring and control functions D Comprehensive internal controls and independent audits. Simulation techniques typically involve detailed assessment of the potential effects of the changes in interest rates on earnings and economic value by simulating the future path of interest rates and their impact on cash flows. The exchange rate fluctuates depending on several factors like demand, supply, balance of payments, trade deficit, Government borrowings, inflation, interest rate, political environment etc.

Foreign Exchange Risk is defined as a measure by the variance of the domestic currency value of an asset, liability or operating income that is attributable to unanticipated change in the exchange rate. Foreign Exchange Risk the risk that relates to gains or losses that arise due to fluctuations in the exchange rates. An appreciation or a depreciation in the exchange rate will lead to a change in value of all assets and liabilities that are denominated in foreign currency.

Foreign Exchange Risk may be defined as the risk that a bank may suffer losses as a result of adverse exchange rate movements during a period in which it has an open position either spot or forward or a combination of both in an individual Foreign Currency.

Foreign Exchange exposure can be broadly classified into three categories depending upon the nature of exposure. They are 1 Transaction exposure 2 Translation exposure and 3 Operating exposure. Translation exposure becomes a transaction exposure at some point of time when the Foreign Exchange is extinguished through sale and purchase of foreign currency. A FE Option is a contract for future delivery of a currency in exchange for another where the holder of the option has the right without an obligation to buy or sell the currency at an agreed price on a specified future date.

The difference between Futures and Forward Contracts is forward contracts are over the counter products with no secondary market or transferability where as Futures are traded on an exchange.

In some cases there may not be any exchange of currencies at the outset but only the servicing payments are Swapped. Exchanging cash flow in one currency for cash flow in another.

ALM is concerned with risk management and provides comprehensive and dynamic frame work for measuring. For measuring and managing net funding requirements, the use of maturity ladders and calculation of cumulative surplus or deficit of funds at selected maturity dates is adopted as a standard tool. Securities held in the trading book are subject to certain pre-conditions like: 1 The composition and value are clearly defined. Bills payable — the core component may be shown under 1 — 3 years bucket and the rest in 1 — 14 days bucket.

Shares, units of mutual funds open ended — over 5 years bucket. Securities in trading book — 1 — 14 days, 15 — 28 days and 29 — 90 days according to defeasance periods. Fixed assets over 5 years bucket 9. Intangible assets — over 5 years bucket All Overdue liabilities — 1 — 14 days bucket.

Capital, Reserves, Surpluses and Current deposits are non — sensitive. Savings Bank — non interest paying portion non — sensitive and portion on which interest is payable may be included in 3 — 6 months bucket. Borrowings from RBI — upto one month bucket. Bills payable, inter office adjustments, provisions — non — sensitive.

Cash — non — sensitive 2. Balance with RBI — interest earning portion 3 — 6 months bucket and the balance amount is non — reactive. Balance with other banks —.

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