21 21 Union Bank Alm Group 15

8/11/2019 21 21 Union Bank Alm Group 15

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RISK MANAGEMENT & ASSET LIABILITY

MANAGEMENT AT UNION BANK OF INDIA


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Origin and emergence of ALM

Post-liberalization: Deregulation in the banking sector.

Banks are free to determine their own interest rates on term deposits,

loans and advances & coupon rates on govt. securities and other financial

instruments are also market rated.

Intense competition with increasing volatility in domestic interest rate

as well as foreign exchange rates brought pressure on profitability and

long tenor for existence.

Banks needs to be alert and conscious of developments in money

market and accordingly take business decisions.

Here arose the need to address r isk in a structured manner. I t attempts to

match the assets and liabil i ties in terms of their matur i ty and interest

rate sensiti vity so that the r isk ar ising out of such mismatches (interest

rate r isk and li quidi ty ri sk) can be within the desired limit.


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Asset Liability Management

ALM is the process involving decision making about thecomposition of assets and liabilities including off balance

sheet items of the bank / FI and conducting the risk

assessment.


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Concept of ALM

ALM is concerned with strategic management of Balance

Sheet by giving due weightage to market risks viz. Liquidity

Risk, Interest Rate Risk & Currency Risk.

ALM function involves planning, directing, controlling the

flow, level, mix, cost and yield of funds of the bank.

ALM builds up Assets and Liabilities of the bank based on

the concept of Net Interest Income (NII) or Net Interest

Margin (NIM).


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ALM Objectives

ALM in bank has mainly following objectives.

Liquidity Risk Management.

Interest Rate Risk Management.

Profit Planning and Growth Projection.

A fair ALM practice in a bank addresses to all these 3objectives.


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Liquidity Risk

Liquidity of financial institution is its ability to increase

funding in assets and meet payment obligations, as they fall

due, both efficiently and economically.

It originates from the mismatches in the maturity pattern of

assets and liabilities. Banks take deposits for short term and

lend or invest for long term.

So, managing liquidity is among the most important

activities conducted by banks.


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Interest Rate Risk

Interest Rate risk, as far as a financial institution is concerned, is the

risk that the value of its assets and liabilities and also its net interest

income may get adversely affected due to movements in interest

rates. Any mismatch in cash flows or re-pricing dates of assets or

liabilities exposes banksNet Interest Income (NII) or Net interest

Margin (NIM) to variations.

Apart from an impact on NIM, interest rate risk also affects the

Market value of Equity (MVE) of the bank.

Calculation: NII = Interest Income Interest Expenses

NIM = NII / Total Assets


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ALM and organization

BOARD OF DIRECTORS

The Board of directors of the bank decides the risk

management policy, its implementation and set the exposure

limits.

Asset - Liability Committee (ALCO)

ALCO consist of the bank's senior management including

CEO. They are responsible for ensuring adherence to the limits

set by the Board as well as for deciding the business strategyof the bank.

Guidelines for ALCO by RBI


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ALM and organization (contd.)

MID OFFICE

An effective Middle Office provides the independent risk

assessment which is critical to ALCO's key-function of

controlling and managing market risks in accordance with

the mandate established by the Board/Risk Management

Committee.


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Tools used in ALM and assessment of risk

1. Traditional Gap Analysis

2. Simulation Method3. Duration Gap Method

4. Value at Risk


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Company Profile

Public Sector Bank with a banking journey of 88 years

26,000 skilled employees

55.43% share capital held by the Government of India IPO - August 20, 2002 & FPO - February 2006

Business mix of Rs 2,92,000 cr. i.e. US $ 65.18 billion

2800 plus branches across India

1135 networked ATMs

Tele-banking facility, Internet Banking, other value-added

services like Cash Management Service, Insurance, Mutual

Funds and Demat


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ALM and Risk management in UNION

BANK OF INDIA

Board of Directors

Formulation and implementation of structures, policies and

procedures for risk management.

Board also sets limits by assessing risk appetite, skills

available for managing risk and risk bearing capacity.

Asset Liability Management Committee (ALCO)

The Committee decides on product pricing, mix of assets

and liabilities, stipulates liquidity and interest rate risk

limits, monitors them, articulates Banks interest rate view

and determines the business strategy of the Bank.


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Risk Management Department

The department has the responsibility of identifying,

measuring, monitoring, reporting of risk positions and

making recommendations in developing the policies and

verifying the models that are used for risk measurement

from time to time.

ALM and Risk management in UNION

BANK OF INDIA (contd.)


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Asset liability management in UNION

BANK OF INDIA

Short term objective: protecting the banks net interestincome

Long term objective: increasing market value of the equityin the long run for enhancing shareholders wealth.

Risk includes liquidity management, interest rate riskmanagement and the pricing of assets and liabilities

Prepares reports such as Structural Liquidity, Interest RateSensitivity, Fortnightly Dynamic Statement etc.


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Duration Gap analysis, Contingency Funding Plan,

Contractual Maturity report etc. are generated at periodic

intervals for ALCO.

The Mid Office group positioned in treasury with

independent reporting structure on risk aspects ensure

compliance in terms of exposure analysis, limits fixed and

calculation of risk sensitive parameters like VaR, PV01,

Duration, Defeasance Period etc. and their analysis.

Asset liability management in UNION

BANK OF INDIA (contd.)

4


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Maturity buckets in UNION BANK OF

INDIA

Sl.No Maturity Buckets

1 Upto 7 days

2 7 to 14 days

3 15 to 28 days

4 29 days to 3 months5 Over 3 months upto 6 months

6 Over 6 months upto 1yaer

7 Over 1 year upto 3 year

8 Over 3 year upto 5 year

9 Above 5 years

Total of all assets in this bucket must match with all liability in the same

maturity. If there is a mismatch in the bucket where in liabilities are more

than we call it GAPS.


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GAP FINANCING

Gap can be financed from

Market borrowings(call/ term)

Repos

LAF(Liquidity Adjustment Facility)

Refinance

Deployment of foreign currency

Resources after conversion into rupees (unswaped foreigncurrency funds)


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Fixation of Interest for Deposits and Loans

and ALM

When the gap limits exceed, bank will go for gap financing

and the cost in the maturity bucket will go up. So bank will

be forced to increase the lending rates or decrease the

deposit rates.

It is also seen that bank fixes attractive rates for loans and

deposits for certain tenure. This is to attract more

customers to the maturity bucket.


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Risk management in UNION BANK OF

INDIA

LIQUIDITY RISK MANAGEMENT

The bank prepares the Statement of Structural Liquidity by

placing all cash inflows and outflows in the maturity ladderaccording to the expected timing of cash flows.

maturing liability - cash outflow

maturing asset - cash inflow


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INTEREST RATE RISK

Immediate impact - Net Interest Income.

Long term impact - BanksNet Worth.

MEASURING OF IRR

Earnings Perspective

Economic Value Perspective

In IRR also assets and liabilities are put under various

maturity buckets called as interest rate maturity buckets

and the maturity buckets are matched and managed.


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MEASURING IRR

Earnings Perspective

Traditional GAP Analysis conducted on the monthly basis to

assess impact on changes in IR on banks earnings due to

changes in NII.

Economic Value Perspective

Conducted on quarterly basis to assess the long term

impact of changes in IR on market value of Banksequity or

net worth due to changes in the economic value of the

Banksassets, liabilities and off-balance sheet positions.


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21 21 Union Bank Alm Group 15

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