Consistency with bank’s ALM policy
Category: Branches
ALM: general comments
Asset & Liability management is a topic not always well known, especially outside treasury and central management officers in a bank’s head office.
Definition for ALM: set of techniques aiming at assessing the bank’s sensitivity to risks with the use of modelling and projections. It traditionally focuses on the main financial risks, but can have a broader range and be in charge of the entire financial risk management of a bank.
The issue here is to ensure that branch business is in line with directives gives by the ALM policy. It requires and adequate information system and decision implementation procedures.
ALM: pedagogical exercise
Assumptions on interest rates
| Lending rates | Refinancing rates | ||
| 1 month | 15,00% | 1 month | 8,00% |
| 6 months | 20,00% | 6 months | 10,00% |
Samplebank balance sheet
| Assets | M RUR | Liabilities | M RUR |
| Cash in hand | 0 | Demand deposit | 250 |
| 1 month loans | 400 | 1 month deposit | 250 |
| 6 months loans | 200 | 6 months deposit | 100 |
| Total | 600 | Total | 600 |
Question 1:
What is the term value of the bank, assuming that there will be no other transactions?
Question 2:
Interest rates (all of them) drop by 2 points. What is the interest rate sensitivity of the bank?
Answers
Question 1:
Calculating the term value of the bank:
| Assets | Amount | i. rate | Gain | Liabilities | Amount | i. rate | Cost |
| M RUR | % | M RUR | M RUR | % | M RUR | ||
| Cash in hand | 0 | 0,0% | 0,00 | Demand deposit | 250 | 0,0% | 0,00 |
| 1 month loans | 400 | 15,0% | 5,00 | 1 month deposit | 250 | 8,0% | 1,67 |
| 6 months loans | 200 | 20,0% | 20,00 | 6 months deposit | 100 | 10,0% | 5,00 |
| Total | 600 | 25,00 | Total | 600 | 6,67 |
| Term value of the bank = | 18,33 M RUR |
Question 2:
Calculation of the interest rate sensitivity of the bank, assuming that all lines of balance sheet sustain the change
| New interest rates: | |||
| Lending rates | Refinancing rates | ||
| 1 month | 13,00% | 1 month | 6,00% |
| 6 months | 18,00% | 6 months | 8,00% |
| Assets | Amount | i. rate | Gain | Liabilities | Amount | i. rate | Cost |
| M RUR | % | M RUR | M RUR | % | M RUR | ||
| Cash in hand | 0 | 0,0% | 0,00 | Demand deposit | 250 | 0,0% | 0,00 |
| 1 month loans | 400 | 13,0% | 4,33 | 1 month deposit | 250 | 6,0% | 1,25 |
| 6 months loans | 200 | 18,0% | 18,00 | 6 months deposit | 100 | 8,0% | 4,00 |
| Total | 600 | 22,33 | Total | 600 | 5,25 |
| Term value of the bank = | 17,08 M RUR |
compared with 18,33 before the change. The bank has a sensitivity of 0,62 M RUR per percent change in interest rates.