CHAP 20-COMPONENTS OF
ASSETS & LIABILITIES IN BANK’S BALANCE SHEET
·
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
