Asset and Liability Management (ALM)

In banking, asset and liability management (ALM) is used to manage the risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. Banks face several risks like liquidity risk, market risk, interest rate risk, credit risk, and operational risk. Asset Liability Management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk faced by banks, other financial services companies, and corporations. Banks manage the risks of Asset liability mismatch by matching the assets and liabilities according to the maturity pattern or matching the duration, by hedging and by securitization. Asset and liability management remain high-priority areas for bank regulators, with an emphasis on the management of market risk, liquidity risk, and credit risk. Asset/liability managers face the challenge of keeping pace with industry changes as new areas of risk are identified and new tools and models are developed toContinue reading

Different Types of Risks Faced by Banks Today

All companies which have a profit maximizing objective hold a certain degree of risk whether through microeconomic or macroeconomic factors. Banks also face a number of risks atypical of non financial companies due to the payment and intermediary function which they perform. Recent changes in the banking environment has lead to an increased pressure to maximize shareholder value, this means that banks take on a higher risk in order to gain a higher return. It is due to this increased pressure and market volatility that banking risk needs such effective management to ensure the banks continued solvency. Risk can be defined as an “exposure to uncertainty of outcome” measured by the volatility (standard deviation) of net cash flow within the firm. Banks aim to add equity to the bank by maximizing the risk adjusted return to shareholders highlighting the importance of fully considering the risk and return business equation. ExposureContinue reading

Impact of Banking Regulations on Financial Intermediation

Banks have all along played the role of financial intermediaries by channelizing funds primarily from the household sector to producing sector and the efficiency and smoothness with which such intermediation is done by banks are one of the prime parameters that determine the economic efficiency and consequent industrial and material progress of a society. Financial intermediation has a cost and that cost is reflected in bank rates and overhead expenditures incurred by banks. Bank rates, however, are not determined in isolation or only from the perspective of profit maximization by the banking sector. These rates are impacted by many other economic and statutory issues pertaining to a particular economy and such issues may vary widely from economy to economy depending upon the administrative attitude towards matters of equanimity in various sectors of the economy, especially the banking sector itself. The general view among experts in this field is that ifContinue reading

Bank Risk Exposure Types – On-balance Sheet and Off-Balance Sheet Exposures

Generally, credit risk is related to the traditional bank lending activities, while it also comes from holding bonds and other securities. Basel (1999) reports that for most banks, loans are the largest and most obvious source of credit risk; however, throughout the activities of a bank, which include in the banking book as well as in the trading book, and both on and off the balance sheet, there are also other sources of credit risk. Various financial instruments including acceptances, inter-bank transactions, financial futures, guarantees, etc increase banks’ credit risk. Therefore, it is indispensable to identify all the credit exposures— the possible sources of credit risk for most banks, which can also serve as a starting point for the following parts of this work. 1. On-balance Sheet Exposures Commercial and industrial, real estate, consumer and others are the most common types of loans. Commercial and industrial loans can be madeContinue reading

The Importance of Credit Risk Management in Banking

Credit risk implies a potential risk that the counterparty of a loan agreement is likely to fail to meet its obligations as per the original loan agreement, and may eventually default on the obligation. Credit risks can be classified into many forms such as options, equities, mutual funds, bonds, loans, and other financial issues as well, which in extensions of guarantees and the settlement of these transactions. Is it Important for the Banks to Manage their Credit Risks? Risk is always associated with banking activities, and taking a risk is an important part of any banking operation, there is hardly any banking operation without the risk. Most of the bankers are said to be sound when they have a clear overview of what is the amount of risk involved in the current transaction and they make sure that some of the partly earnings are therefore kept for these risks. TheContinue reading

8 Risks Faced by Modern Banks at the Present Competitive Business World

The unanticipated part of the return, that portion resulting from surprises is the true risk of any investment. If we always receive what we expect, than the investment is perfectly predictable and, by definition, risk-free. In other words, the risk of owning an asset comes from surprises-unanticipated events. RISK is a concept that denotes the precise probability of specific eventualities. It is simply the future uncertainty and not only the incidents of predictable outcomes but also the unpredictable favorable outcomes. All the firms or companies whether it is in real or providing service are facing some sort of risk at present competitive business world to run its business. Banks are one of them in these regard and it is facing possibility of risk in terms of money and their achieved reputation. Bank is a financial institution that primarily deals with borrowing and lending money from the people by the peopleContinue reading