CAIIB BFM Unit 29 - Components of Assets & Liabilities in Bank's Balance Sheet

CAIIB BFM Unit 29 - Components of Assets & Liabilities in Bank's Balance Sheet (Year: 2019)

  • At macro-level. Asset Liability Management involves the formulation of critical business policies, efficient allocation of capital and designing of products with appropriate pricing strategies.
  • At micro-level the Asset Liability Management aims at achieving profitability through price matching while ensuring liquidity by means of maturity matching.

  • ALM is therefore, the management of the Net Interest Margin (NIM) to ensure that its level and riskiness are compatible with risk/return objectives of the bank.
  • The strategy of actively managing the composition and mix of assets and liabilities portfolios is called balance sheet restructuring.

  • The impact of volatility on the short-term profit is measured by Net Interest Income.Net Interest Income = Interest Income - Interest Expenses.
  • Minimizing fluctuations in  NII stabilizes the  short term profits of the banks.
  • Net Interest Margin is defined as net interest income divided by average total assets. Net Interest Margin (NIM) = Net Interest Income/Average total Assets.
  •  Net Interest Margin can be viewed as the 'Spread' on earning assets. The higher the spread the more will be the NIM
  • The ratio of the shareholders funds to the total assets(Economic Equity Ratio) measures the shifts in the ratio of owned funds to total funds. This fact assesses the sustenance capacity of the bank.
  • Price Matching basically aims to maintain spreads by ensuring that deployment of liabilities will be at a rate higher than the costs.
  • Liquidity is ensured by grouping the assets/liabilities based on their maturing profiles. The gap is then assessed to identify future financing requirements

  • Profit = Interest Income - Interest expense - provision for loan loss + non-interest revenue - non-interest expense - taxes