Asset Liability Management

Topics: Asset, Liquidity risk, Balance sheet Pages: 21 (6174 words) Published: May 21, 2011

Industry Best Practices

14 July 2005


Focus Group Members
Asset Liability Management

Team Co-ordinator Sudhir Chandra Das Arif Khan Asad Khan Jadab Malakar Team Members Nehal Ahmed S. H. Aslam Habib Tapan K. Podder

DGM GM MD (Designate) Head of Finance & Company Secretary SVP & Company Secretary Head of Finance & Resources and Company Secretary MD

Bangladesh Bank IDLC of Bangladesh Ltd. Fareast Finance & Investment Ltd. National Housing Finance and Investments Ltd. International Leasing and Financial Services Ltd. Delta Brac Housing Finance Corporation Ltd. Prime Finance & Investment Ltd.

Asset Liability Management
Executive Summary Heading 1.0 1.1 1.2 1.3 1.4 1.5 2.0 2.1 2.2 2.3 2.4 2.5 2.6 3.0 3.1 3.2 3.3 3.4 4.0 4.1 4.2 4.3 4.4 4.5 4.6 5.0 5.1 5.2 5.3 Introduction Background Objectives Scope Methodology Limitations Balance Sheet Risk Profile Liquidity Risk Interest Rate Risk Prepayment Risk Credit Risk Reinvestment Risk Event Risk Asset Liability Management (ALM) Team Composition of Asset Liability Management Team Roles and responsibilities of Asset Liability Management (ALM) Team Periodical Meeting Asset Liability Management Flowchart Policy Statement Loan/Fund Ratio Liquidity Contingency Plan Maturity wise Cashflow Statement Maturity wise Interest Rate Profile Term of Lending Vs. Borrowing Compliance Balance Sheet Risk Management Process ALM Information System ALM Organization ALM Process 5.3.1 Liquidity Risk Management 5.3.2 Interest Rate Risk Management 6.0 6.1 6.2 Conclusion and Recommendation Action Plan Feedback Appendix iv Page No. 1 1 1 1 1 1 2 2 3 3 3 3 4 4 4 4 4 4 5 5 5 5 5 5 5 6 6 6 6 6 8 10 10 10

Executive Summary

Asset Liability Management is the most important aspect for the Financial Institutions to manage Balance Sheet Risk, especially for managing of liquidity risk and interest rate risk. Failure to identify the risks associated with business and failure to take timely measures in giving a sense of direction threatens the very existence of the institution. It is, therefore, imperative for the Financial Institutions to form “Asset Liability Management Committee (ALCO)” with the senior management as its members to control and better manage its Balance Sheet Risk.

The main responsibilities of ALCO are to look after the Financial Market activities, manage liquidity and interest rate risk, understand the market position and competition etc. In carrying out its responsibilities, the ALCO needs to convene periodical meeting and should regularly review the decisions of the meeting with due consideration of the market situation.

The report aims at promoting international best practices in Balance Sheet Risk Management for the Financial Institutions in Bangladesh. The purpose of this paper is to provide guidance to management and to train new staffs. This is intended to be the basic framework for further development of skill and to introduce new policies and processes as we make progress in understanding and implementing the basics.


1.0 Introduction 1.1 Background Every Financial Institute irrespective of its size is generally exposed to market liquidity and interest rate risks in connection with the process of Asset Liability Management. Failure to identify the risks associated with business and failure to take timely measures in giving a sense of direction threatens the very existence of the institution. It is, therefore, important that the strategic decision makers of an organization assume special care with regard to the Balance Sheet Risk management and should ensure that the structure of the institute’s business and the level of Balance Sheet risk it assumes are effectively managed, appropriate policies and procedures are established to control the direction of the organization. The whole exercise is with the objective of limiting these...
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