This document discusses asset liability management (ALM) in banks. It begins with definitions of ALM and describes the objectives of ALM as including efficient capital allocation, product pricing, and profitability and risk management. It outlines the components of an ALM framework including strategic, organizational, operational, and other elements. It also describes the ALM process in banks including data collection, analysis, decision making, and monitoring. Key aspects covered include the ALM committee, models used like gap analysis and duration analysis, the role of ALM under Basel standards, and ALM software options.

1. Banking Technology
Asset Liability Management

2. Banking Technology – M.Tech (IT)
Agenda
• ALM basics and objectives
• ALCO and its components
• ALM Models
• ALM and Basel
• ALM processes in banks

3. Banking Technology – M.Tech (IT)
Introduction
Definitions
Asset Liability Management is the process of decision making
to control risks of a system through the dynamic balancing of
assets and liabilities in order to sustain its existence, stability,
and growth .
A risk management technique designed to earn an adequate
return while maintaining a comfortable surplus of assets
beyond liabilities.

4. Banking Technology – M.Tech (IT)
Cycle of flow of Assets and
Liabilities of a bank
Depositors Borrowers/EntitiesBANKDeposit Investment/
Lending
Repayment to the bank(Asset)
Repayment by the bank(Liability)

5. Banking Technology – M.Tech (IT)
Objectives of ALM
• Formulation of critical business processes
• Efficient allocation of Capital
• Developing new products with appropriate pricing
• To maximize profitability
• To maximize Net Interest Income (NII)
• To maximize Net Interest Margin (NIM)
• To maximize Market Value of Equity (MVE)
• To minimize physical cash holding
• To maximize business per employee (BPE)
• To manage the volume, mix, maturity, rate sensitivity, quality and
liquidity of assets and liabilities

6. Banking Technology – M.Tech (IT)
Components of ALM
Asset
Liability
Management
1
Strategic
framework 2
Organizational
framework
3
Operational
framework
4
Analytical
framework
5
Technology
framework
6
Information
Reporting
framework
7
Performance
Measurement
framework
8
Regulatory
Compliance
framework
9
Control
framework

7. Banking Technology – M.Tech (IT)
Asset Liability Management Committee
(ALCO)
First step in ALM process is to constitute Asset Liability
Committee (ALCO)
ALCO should have atleast 4 members and a maximum of 8
members consisting of the bank’s senior management from
various departments and the CMD.
ALCO should be responsible for ensuring adherence to the limits
set by the Board as well as for deciding the business strategy of
the bank

8. Banking Technology – M.Tech (IT)
Structure of ALCO
Asset Liability Committee
Chairman/CMD
Asset/Liability
Treasury Department
Credit Department
Planning Department
IT Department

9. Banking Technology – M.Tech (IT)
Functions of ALCO
• Review economic scenario
• Articulate the interest rate view
• Price assets and Liabilities
• Establish investment policy guidelines
• Examine loan portfolio
• Measure liquidity risk, interest rate risk and FOREX risk
• Review performance of the bank
• Involve in budgeting/planning
• Discuss on new products
• Report developments at regular intervals to the MD,
Management Committee and to the Board

10. Banking Technology – M.Tech (IT)
ALM Models
• Gap Analysis Model
• Duration Gap Analysis Model
• Stochastic Programming Models
Gap Analysis Model
GAP Model is useful for Liquidity & Interest Rate Risk Management
Methodology :
• The assets and liabilities are classified into different maturity
buckets.
• For assessing the liquidity of the bank, maturity gap for each
maturity bucket is assessed.
• For assessing the interest rate risk, forecasting of interest rate
fluctuations and classification of assets and liabilities into
sensitive and non-sensitive categories is done.
• Forecasting period depends on Govt. monetary policy, which is
6 months in India.

11. Banking Technology – M.Tech (IT)
ALM Models…
Duration Gap Analysis Model
Duration is a measure of the interest rate sensitivity of assets and
liabilities
Duration =The Weighted Average Maturity of Future Cash Flows -
Average time required to recover the funds committed to an
investment
DGAP is defined as :
D gap = DA-DL* TL
TA
DA
= weighted average duration of assets
DL
= weighted average duration of Liabilities
TL = total liabilities
TA = total assets

12. Banking Technology – M.Tech (IT)
ALM Models…
Duration Gap Analysis Model
Stochastic Programming (SP) Model is useful for supporting
decision making under uncertainty, while taking into account the
probability distributions of uncertain parameters.
SP Model uses Scenario analysis. A scenario is a description of a
possible state of an organization's future environment, considering
possible developments of relevant interdependent factors of the
environment.

13. Banking Technology – M.Tech (IT)
ALM and Basel
Basel Committee on Banking Supervision- Committee of banking
supervisory authorities, established by the Central Bank Governors of
the Group Ten countries
Established in 1975
Consists of senior representatives of bank supervisory authorities and
central banks from Belgium, Canada, France, Germany, Italy, Japan,
Luxembourg, Netherlands, Sweden, Switzerland, United Kingdom and
United States
Basel I prescribed uniform capital adequacy for credit risks – 8% of
commercial assets.
Basel II: capital based on estimated risk on each asset, or asset class,
calculated through “probability of default” and “loss given default”.

14. Banking Technology – M.Tech (IT)
ALM and Basel…
Three pillars of Basel II
• Minimum capital requirements- to address market, credit and
operational risks
• Supervisory review process- to ensure compliance with
regulations, transparency and accountability and address
interest rate risk
• Market discipline through meaningful disclosures
As per Basel II norms and subsequent RBI guidelines Indian Banks will
be required to have analytical systems, models and tools in place for
risk management, measurement and control

15. Banking Technology – M.Tech (IT)
ALM Process
• Data collection
• Consolidation
• Reporting
• Analysis
• Decision-making
• Reviewing
• Feedback
• Monitoring and control

16. Banking Technology – M.Tech (IT)
ALM Process
Br1
TBA
data
Br2
TBA
data
Br3
TBA
data
Br4
TBA
data
ALM
Specific
input
ALM
Specific
input
ALM
Specific
input
ALM
Specific
input
SSL
SIRS
SSDL
A
L
C
O
StatisticalAnalysis
Datawarehousing
ALMDataGeneration
Portfolio
re-alignment
SSL – Strategic Securities Lending
SIRS - Securities information retrieval service
SSDL – Store schema definition language

17. Banking Technology – M.Tech (IT)
ALM Software Models
Package Name: ALMS II
Vendor/Developer : Alltel Information Systems, Little Rock, AR (501) 220-5100
Package Name: BancWare Convergence
Vendor/Developer : SunGard Trading and Risk Systems
Website address: http://www.garp.com/servicesandsoftware/viewapp.asp
Package Name: BASIS for windows
Vendor/Developer : SunGard Trading and Risk Systems
Website address: http://www.cocc.com/news/DCG.htm
Package Name: Silver, Gold Monaco
Vendor/Developer : DollarMark Solutions, Inc. Birmingham, AL (205) 939-3674
Website address:http://www.cocc.com/news/DCG.htm
Package Name: OAP Manager
Vendor/Developer : DPSC Software Inc. Calabasas, CA (800) 825-DPSC
Website address:Not available

18. Banking Technology – M.Tech (IT)
ALM Software Models…
Package Name: ALM for Windows
Vendor/Developer : Financial Technology, Inc. Chicago, IL (800) 541-9537
Website address: http://www.rtg-online.com/company.cgi?cid=2285&from=list
Package Name: A/L Monitor
Vendor/Developer : GRA, Thompson, White & Co. Merriam, KA (913) 677-3383
Website address: Not available
Package Name: Asset Liability Budget Management
Vendor/Developer : Interactive Planning Systems
Website address: http://www.ips-sendero.com/solutions/al/album.htm
Package Name: Asset Liability Management & Advanced Portfolio Monitor
Vendor/Developer : James Baker & Associates
Website address: http://www.jamesbaker.com/software/apm.html
Package Name: PROFITSTAR Levels 1+2, 3
Vendor/Developer : Profitstar Inc.
Website address: http://www.profitstar.com/

19. Banking Technology – M.Tech (IT)