Professional Documents
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M S Ahluwalia
CAIIB Super-Notes
Sirf Business
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Contents
Coverage:
1. Introduction
2. Definition
3. Dimensions and Role of
Liquidity Risk Management
4. Measuring and managing
liquidity risk
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
1.
INTRODUCTION
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Liquidity
Objectives of Asset Liability Management:
Ensuring profitability
Ensuring liquidity
Liquidity
Represented by quality and marketability of assets and liabilities
Exposes the organisation to liquidity risk
Liquidity risk is a normal aspect of everyday management of a financial
institution. Very rarely result in solvency risk problems
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
2.
DEFINITION
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CAIIB Super-Notes
Sirf Business
Liquidity
Required to meet deposit withdrawals and to fund loan
demands
To compensate for expected and unexpected balance sheet
fluctuations
Provide funds for growth
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
3.
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Sirf Business
Liquidity Management
Process of generating funds to meet contractual or
relationship obligations a reasonable prices at all times
New loan demands, existing commitments, and deposit
withdrawals are the basic contractual or relationship
obligations that a bank must meet
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
CAIIB Super-Notes
Sirf Business
Current
Liquidity
Position
Anticipated
future funding
needs
Sources of
funds
Options for
reducing
funding needs
Present and
anticipated
asset quality
Present and
future earnings
capacity
M S Ahluwalia
Present and
planned capital
position
CAIIB Super-Notes
Sirf Business
Increase in
NPAs
Deposit
Concentrations
Downgrading
by rating
agencies
Expanded
business
opportunities
Acquisitions
New tax
initiatives
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Dispose of
Liquid Assets
Increase short
term
borrowings
Decrease
holdings of less
liquid assets
Increase
liabilities of a
term nature
Increase capital
funds
Securitisation
of Assets
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Internal
Perception
of
Institution
in various
markets
Local
Regional
National
International
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External
Geographic
Systemic
Instrument
Specific
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Sirf Business
Types of Risks
Funding Risk
Need to replace net
outflows due to
unanticipated
withdrawals/non-renewal
Time Risk
Need to compensate for
non-receipt of expected
inflows of funds
Call Risk
Crystallization of contingent
liability
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
4.
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Sirf Business
Good management
information system
Central Liquidity
control
Diversification of
funding sources
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CAIIB Super-Notes
Analysis of net
funding
requirements under
alternative scenarios
Contingency
Planning
Sirf Business
Developing a
structure for
managing liquidity
risk
Setting tolerance
level and limit for
liquidity risk
Measuring and
Managing Liquidity
Risk
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Strategy should
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CAIIB Super-Notes
Sirf Business
2.
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CAIIB Super-Notes
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Management Structure:
i)
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CAIIB Super-Notes
Sirf Business
Funding needs
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Stock Approach
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CAIIB Super-Notes
Sirf Business
Stock Approach
Ratio of Short Term Liabilities to Liquid Assets:
Short Term Liabilities/Liquid Assets:
Lower the Ratio the better
Ratio of Liquid Assets to Total Assets:
Higher the Ratio the better
Ratio of Short Term Liabilities/Total Assets:
A lower ratio is desirable
Ratio of Prime Asset to Total Asset:
Higher the ratio the better
Ratio of Marketable liability to total asset:
Lower the ratio better
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Sirf Business
Flow Approach
Also known as Gap Method
Three major dimensions:
1.
2.
3.
Contingency Planning
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Sirf Business
CAIIB Super-Notes
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Aspects
Maturity Ladder
Alternative Scenarios
Measuring liquidity over the chosen time frame
Assumptions used in determining cash flows
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Outflows include
Liabilities falling due
Contingent liabilities, especially committed lines of credit that can be
drawn down
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Alternative Scenarios
General Market
Conditions
Benchmark for the
normal business
behavior of the
balance sheet
Useful in managing a
banks use of
deposits and other
debt markets
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Sirf Business
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
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CAIIB Super-Notes
Sirf Business
Contingency Planning
Should address two major questions:
Does management have a strategy for handling a crisis?
Procedures to ensure timely, uninterrupted flow of information
Clear division of responsibility
Strategy for taking certain actions to alter asset and liability behaviours
Relationships
Does management
emergency?
Back up liquidity for emergency situations
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
All Assets & Liabilities to be reported as per their maturity profile into 10
maturity Buckets:
Tomorrow
2 to 7 days
8 to 14 days
15 to 28 days
29 days and up to 3 months
Over 5 years
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
M S Ahluwalia
Sirf Business