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What is Asset Liability Management (ALM)? What is Gap Analysis? - YouTube
Channel: NAGRAJ EDUCATIONAL SERVICES
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Welcome to my channel.
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Welcome to my channel.
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This video is about Asset Liability Management
and Gap analysis.
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This video is about Asset Liability Management
and Gap analysis.
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Banks and Financial Institutions normally
have receivables and payables just like other
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Banks and Financial Institutions normally
have receivables and payables just like other
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commercial organisations.
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commercial organisations.
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So, the receivables on a day to day basis
should be sufficient to cover the day to day
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So, the receivables on a day to day basis
should be sufficient to cover the day to day
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payments.
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payments.
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In banks, the deposits Savings Bank and Current
Accounts, the cheques are drawn or withdrawn
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In banks, the deposits Savings Bank and Current
Accounts, the cheques are drawn or withdrawn
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from ATMs.
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from ATMs.
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So, there is a demand on a daily basis.
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So, there is a demand on a daily basis.
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It is not that all the deposits are withdrawn
on a day.
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It is not that all the deposits are withdrawn
on a day.
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But there will be an average outgo or an average
demand, that is payable.
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But there will be an average outgo or an average
demand, that is payable.
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It is not only Savings and Current Accounts,
but also Fixed Deposits which are due but
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It is not only Savings and Current Accounts,
but also Fixed Deposits which are due but
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not renewed.
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not renewed.
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They are also payable.
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They are also payable.
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Besides there are other Bills payable, Accounts
Payable, Expenses and other liabilities.
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Besides there are other Bills payable, Accounts
Payable, Expenses and other liabilities.
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So, there are all payable for a bank.
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So, there are all payable for a bank.
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The assets or Receivables, cash in hand ok,
cash at other banks ok—they are within our
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The assets or Receivables, cash in hand ok,
cash at other banks ok—they are within our
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control.
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control.
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The loans and advances which are given, some
are payable after a specified period.
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The loans and advances which are given, some
are payable after a specified period.
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So whatever is expected to be back today,
it is called receivables.
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So whatever is expected to be back today,
it is called receivables.
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So for day to day, through the receivables
for day to day is put into brackets/buckets
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So for day to day, through the receivables
for day to day is put into brackets/buckets
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of time intervals –daily basis, 2 to 7 days,
8 to 14 days, 15 to 28 days, 29 to 90 days,
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of time intervals –daily basis, 2 to 7 days,
8 to 14 days, 15 to 28 days, 29 to 90 days,
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91 to 180 days, 181 to 365 days, 1-3 years,
3 to 5 years and above 5 years.
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91 to 180 days, 181 to 365 days, 1-3 years,
3 to 5 years and above 5 years.
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So, the payables and receivables are matched.
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So, the payables and receivables are matched.
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This process of matching the receivables and
payables is in simple terms Asset Liabilit
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This process of matching the receivables and
payables is in simple terms Asset Liability
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Management.
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Management.
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So, if there is a mismatch, the question of
management comes.
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So, if there is a mismatch, the question of
management comes.
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You have to plan, you have to organise, you
have to put proper person on the staff, person
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You have to plan, you have to organise, you
have to put proper person on the staff, person
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on the job.
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on the job.
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Then, there should be co-ordination, there
should be statistical data, there should be
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Then, there should be co-ordination, there
should be statistical data, there should be
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decision support systems.
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decision support systems.
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So all this, all functions of management and
ultimately control.
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So all this, all functions of management and
ultimately control.
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Control is required because the payables
should not be postponed, particularly for
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Control is required because the payables
should not be postponed, particularly for
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depositors.
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depositors.
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Though liquidity has to be managed so well,
that the demand have to be met without any
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Though liquidity has to be managed so well,
that the demand have to be met without any
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break.
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break.
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It is on Demand.
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It is on Demand.
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So, the mismatches have to be worked out with
proper planning of assets.
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So, the mismatches have to be worked out with
proper planning of assets.
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Then second element here, it is risk management
not simply liquidity, obligation to depositors
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Then second element here, it is risk management
not simply liquidity, obligation to depositors
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is certain but the people who take loans and
advances, their repayment is not 100%.
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is certain but the people who take loans and
advances, their repayment is not 100%.
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It is subject to various internal and external
factors.
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It is subject to various internal and external
factors.
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So, there is a chance of a default.
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So, there is a chance of a default.
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It is not simply a credit default, or credit
risk but there are other risks also.
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It is not simply a credit default, or credit
risk but there are other risks also.
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So, the Asset liability management is a framework
for managing the various types of risks, the
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So, the Asset liability management is a framework
for managing the various types of risks, the
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market risks, liquidity risks, interest rate
risk, funding and capital planning, profit
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market risks, liquidity risks, interest rate
risk, funding and capital planning, profit
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planning and growth projections.
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planning and growth projections.
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ALM – It was first introduced from April
1999.
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ALM – It was first introduced from April
1999.
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It is the management of structure of the Balance
sheet (Liabilities to Assets) to maximise
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It is the management of structure of the Balance
sheet (Liabilities to Assets) to maximise
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the net earnings from interest within the
overall risk –preference (present and future)
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the net earnings from interest within the
overall risk –preference (present and future)
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of the institution.
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of the institution.
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Residual maturity is the time period which
a particular asset or liability will still
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Residual maturity is the time period which
a particular asset or liability will still
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take to mature—(i.e, to become due for payment—say,
in case of term deposit or in instalments
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take to mature—(i.e, to become due for payment—say,
in case of term deposit or in instalments
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in case of a term loan) the date can be known
in advance.
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in case of a term loan) the date can be known
in advance.
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So, we can plan very well the matching of
the and receivables and payables.
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So, we can plan very well the matching of
the and receivables and payables.
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So, maturity buckets are worked out as I have
already told you differs from 2 to 7 days
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So, maturity buckets are worked out as I have
already told you differs from 2 to 7 days
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to above 5 years.
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to above 5 years.
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So, it is tabulated and worked out by way
of building a software in a bank, and an
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So, it is tabulated and worked out by way
of building a software in a bank, and any
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mismatch will have to be worked by an ingeneous
financial management.
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mismatch will have to be worked by an ingeneous
financial management.
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When in a particular maturity bucket, the
amount of maturing liability or assets does
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When in a particular maturity bucket, the
amount of maturing liability or assets does
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not match, such position is called a mismatch
position, which creates liquidity crunch or
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not match, such position is called a mismatch
position, which creates liquidity crunch or
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liquidity surplus.
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liquidity surplus.
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Depending on interest rate movements, banks
have to align themselves
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Depending on interest rate movements, banks
have to align themselves
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IN banks, there is a Asset Liability Committee
ALCO –the top most committee in a bank to
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IN banks, there is a Asset Liability Committee
ALCO –the top most committee in a bank to
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oversee the implementation of ALM.
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oversee the implementation of ALM.
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It considers product pricing for both deposits
and advances, the desired maturity profil
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It considers product pricing for both deposits
and advances, the desired maturity profile
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of incremental assets or liabilities in addition
to monitoring the risk levels
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of incremental assets or liabilities in addition
to monitoring the risk levels
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ALM recognises the Current interest rates
and base the decision for future business
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ALM recognises the Current interest rates
and base the decision for future business
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strategy.
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strategy.
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Let us now understand the benefits of ALM—a)
It is a tool that enables bank managements
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Let us now understand the benefits of ALM—a)
It is a tool that enables bank managements
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to take business decisions in an informed
framework; b) It is an integrated approach
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to take business decisions in an informed
framework; b) It is an integrated approach
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to financial management, requiring simultaneous
decisions about the type of amounts of financial
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to financial management, requiring simultaneous
decisions about the type of amounts of financial
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assets and liabilities—both mix and volume—with
the complexities of the financial markets
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assets and liabilities—both mix and volume—with
the complexities of the financial markets
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which the institution operates.
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which the institution operates.
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This is in a nutshell about ALM.
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This is in a nutshell about ALM.
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Gap analysis
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Gap analysis
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Gap analysis is a technique of asset liability
management that can be used to assess interest
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Gap analysis is a technique of asset liability
management that can be used to assess interest
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rate risk or liquidity risk.
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rate risk or liquidity risk.
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Gap Analysis is widely adopted by financial
institutions during the 1980's to manage interest
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Gap Analysis is widely adopted by financial
institutions during the 1980's to manage interest
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rate risk, and also in duration analysis.
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rate risk, and also in duration analysis.
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The gap is the distance between assets and
liabilities.
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The gap is the distance between assets and
liabilities.
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The most commonly seen examples of an interest
rate gap are in the banking industry.
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The most commonly seen examples of an interest
rate gap are in the banking industry.
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A bank borrows funds at one rate and loans
the money out at a higher rate.
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A bank borrows funds at one rate and loans
the money out at a higher rate.
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The gap, or difference, between the two rates
represents the bank's profit in the traditional
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The gap, or difference, between the two rates
represents the bank's profit in the traditional
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way.
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way.
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In a modern way, it is named as SPREAD.
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In a modern way, it is named as SPREAD.
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Beyond SPREAD, the present day banking is
going on.
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Beyond SPREAD, the present day banking is
going on.
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Positive gap and Negative Gap:
Positive Gap is where there are more assets
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Positive gap and Negative Gap:
Positive Gap is where there are more assets
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maturing or repricing in a given period than
liabilities.
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maturing or repricing in a given period than
liabilities.
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A bank with a positive gap is asset sensitive.
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A bank with a positive gap is asset sensitive.
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The opposite is negative gap.
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The opposite is negative gap.
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Maturity or repricing mismatches need immediate
attention and to be planned well before
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Maturity or repricing mismatches need immediate
attention and to be planned well before.
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Maturity gap is a measurement of interest
rate risk for risk-sensitive assets and liabilities.
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Maturity gap is a measurement of interest
rate risk for risk-sensitive assets and liabilities.
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Using the maturity gap model, the potential
changes in the net interest income variable
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Using the maturity gap model, the potential
changes in the net interest income variable
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can be measured
The purpose of gap analysis is to determine
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can be measured
The purpose of gap analysis is to determine
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the bank's sensitivity to interest rate movements,
whereas the purpose of duration analysis is
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the bank's sensitivity to interest rate movements,
whereas the purpose of duration analysis is
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to determine the bank's sensitivity to the
liquidity risk.
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to determine the bank's sensitivity to the
liquidity risk.
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Gap analysis is still being followed by many
financial institutions.
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Gap analysis is still being followed by many
financial institutions.
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It is a foundation for ALM.
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It is a foundation for ALM.
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You may find other important videos in my
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are listed below.
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are listed below.
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