The risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external eventsFor emergence of such a risk four causes have been mentioned and they are people, process, systems and external factors. (a) People risk – Lack of key personnel, lack of adequate training/experience of dealer (measured …
Credit risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. In a bank’s portfolio, losses stem from outright default due to inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively, losses result …
Foreign exchange risk may be defined as the risk that a bank may suffer losses as a result of adverse exchange rate movements during a period in which it has an open position, either spot or forward, or a combination of the two, in an individual foreign currency. The banks are also exposed to interest …
Interest rate risk is the risk where changes in market interest rates might adversely affect a bank’s financial condition. The immediate impact of changes in interest rates is on the Net Interest Income (NII). A long term impact of changing interest rates is on the bank’s net worth since the economic value of a bank’s …
Liquidity risk is the potential inability to meet the bank’s liabilities as they become due. It arises when the banks are unable to generate cash to cope with a decline in deposits or increase in assets. It originates from the mismatches in the maturity pattern of assets and liabilities. Measuring and managing liquidity needs are …
Market risk may be defined as the possibility of loss to a bank caused by changes in the market variables. The Bank for International Settlements (BIS) defines market risk as “the risk that the value of on or off-balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange …
The banking operations are confined to lending, accepting deposits and miscellaneous services. It is the treasury which operates in financial markets directly, establishing a link between core banking functions and market operations. Thus, the market risk is identified and monitored through treasury. Treasury uses derivatives and other means to bridge the liquidity and rate sensitivity …
EXPLAIN THE RELATIONSHIP BETWEEN TREASURY AND ALM? Read More »
Duration is an important measure of the interest rate sensitivity of assets and liabilities as it takes into account the time of arrival of cash flows and the maturity of assets and liabilities. It is the weighted average time to maturity of all the preset values of cash flows. Duration basically refers to the average …
Analytical models are very important for ALM analysis and scientific decision making. The basic models are as follows: (a) GAP Analysis Model (b) Duration GAP Analysis Model (c) Scenario Analysis Model (d) Value at Risk (VaR) model Favorite
Gap analysis model measures the direction and extent of asset-liability mismatch through either funding or maturity gap. It is computed for assets and liabilities of differing maturities and is calculated for a set time horizon. This model looks at the repricing gap that exists between the interest revenue earned on the bank’s assets and the …
The Asset – Liability Committee (ALCO) consisting of the bank’s senior management including CEO should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the bank (on the assets and liabilities sides) in line with the bank’s budget and decided risk management objectives. …
DISCUSS THE ROLE AND FUNCTIONS OF ASSET LIABLITY MANAGEMENT COMMITTEE Read More »
As per the RBI Guidelines on Asset Liability Management (ALM) System, the ALM process rests on following three pillars: (i) ALM Information Systems • Management Information Systems • Information availability, accuracy, adequacy and expediency. (ii) ALM Organisation • Structure and responsibilities • Level of top management involvement (iii) ALM Process • Risk parameters • Risk …
ENUMERATE THE THREE REST PILLARS OF ALM PROCESS AS PER RBI GUIDELINES ? Read More »
Asset Liability Management (ALM) defines management of all assets and liabilities (both off and on balance sheet items) of a bank. It requires assessment of various types of risks and altering the asset liability portfolio to manage risks. Asset Liability Management provides a comprehensive and dynamic framework for measuring, monitoring and managing liquidity, interest rate, …
Banks should not capitalise the Broken Period Interest paid to seller as part of cost, but treat it as an item of expenditure under Profit and Loss Account in respect of investments in Government and other approved securities. However, the banks should comply with the requirements of Income Tax Authorities in the manner prescribed by …
WHAT IS THE TREATMENT OF BROKEN PERIOD INTEREST? Read More »
In respect of securities included in any of the three categories where interest/ principal is in arrears, the banks should not reckon income on the securities and should also make appropriate provisions for the depreciation in the value of the investment. The banks should not set-off the depreciation requirement in respect of these non-performing securities …
The following are to be noted with regard to transactions through SGL Account: • It is necessary for both the selling bank and the buying bank to maintain current account with the RBI. • All transactions in Govt. securities for which SGL facility is available should be put through SGL A/c only.• A SGL transfer …
LIST THE POINTS TO BE NOTED WITH REGARD TO TRANSACTIONS THROUGH SGL ACCOUNT ? Read More »
SGL or CSGL are a demat form of holding government securities with the RBI. SGL stands for ‘Subsidiary General Ledger’ account. It is a facility provided by RBI to large banks and financial institutions to hold their investments in Government securities and Treasury bills in the electronic book-entry form. Such institutions can settle their trades …
EXPLAIN SUBSIDUARY GENERAL LEDGER ACCOUNT OR SGL ? Read More »
A reserve is to be maintained to guard against any possible reversal of interest rate environment on unexpected developments. It is prudent to transfer maximum amount of gains realised on sale of securities to the Investment Fluctuation Reserve (IFR). Banks are free to build IFR up to 10 per cent of the investment portfolio under …
Available for sale (i) The individual scrips in the Available for Sale category will be marked to market at quarterly or at more frequent intervals. (ii) While the net depreciation under each classification should be recognised and fully provided for, the net appreciation under each classification should be ignored. (iii) The book value of the …
RBI GUIDELINES FOR VALUATION OF AVAILABLE FOR SALE Read More »
Held for Trading category The individual scrips in the Held for Trading category will be revalued at monthly or at more frequent intervals and provided for as in the case of those in the Available for Sale category. The book value of the individual scrip will change with the revaluation. Favorite
Held to maturity i) Investments classified under Held to Maturity category need not be marked to market and will be carried at acquisition cost, unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity. (ii) Banks should recognise any diminution, other than temporary, …
RBI GUIDELINES FOR VALUATION OF HELD TO MATURITY Read More »
The securities acquired by the banks with the intention to trade by taking advantage of the short-term price/interest rate movements will be classified under Held for Trading (HFT). The securities which do not fall within the above two categories will be classified under Available for Sale. The banks will have the freedom to decide on …
EXPLAIN THE HEAD AVAILABLE FOR SALE AND HELD FOR TRADING ? Read More »
The securities acquired by the banks with the intention to hold them up to maturity will be classified under Held to Maturity (HTM).The investments included under “Held to Maturity” should not exceed 25 per cent of the bank’s total investments. The banks may include, at their discretion, under Held to Maturity category securities less than …
The entire investment portfolio of the banks should be classified under three categories (a) Held to Maturity (b) Available for Sale and (c) Held for Trading. However, in the balance sheet, the investments will continue to be disclosed as per the following existing six classifications: (a) Government securities, (b) Other approved securities, (c) Shares, (d) …
EXPLAIN THE CLASSIFICATION OF INVESTMENT PORTFOLIO OF THE BANKS? Read More »
The main functions of back-office can be summed up as under: • Co-ordination with front-office to ensure optimum usage of all treasury dealing systems; • Internal control and check over treasury dealings, confirmation and settlement activities, and accounting thereof; • Ensuring compliance with stated treasury procedures and stipulations; • Monitoring of SLR/CRR maintenance and submission …
The back-office is responsible for delivery and settlement of all transactions concluded by the front-office officials. It is also responsible for reconciliation of securities portfolio with respective holding entity. Payment of brokerage to brokers, empanelment of brokers, reviewing performance of brokers and monitoring the volume of business passed on to each broker is also under …
The main functions of mid-office can be summarized as under: (i) Management of risks: (a) Market risk which arises on account of: – Interest rate movement – Foreign exchange rate movement – Commodity prices – Equity prices (b) Liquidity risk (c) Country risk (i) Independent market risk monitoring, measurement, analysis and reporting for bank’s ALCO …
The mid-office can be considered to be the conscience keeper of the treasury. It is responsible for the critical functions of independent market risk monitoring, measurement, analysis and reporting for the bank’s AssetLiability Management Committee (ALCO). Ideally, this is a full time function of reporting to, or encompassing the responsibility for, acting as Asset-Liability Management …
Front-office functions can be summarized as under: • Significant interaction with various trading and delivery teams; • Liquidity Management; • ALM implementation; • Striking of Deals (trading) and earning profits from trading; • Maintenance of CRR and SLR; • Follow ‘When Issued Securities’ place order and square up the order well in time against future …
The scope of functions of front-office, as the name itself states, is to buy, sell and trade in money market instruments, securities, forex, equity, derivatives and precious metal. The decisions in regard to any restructuring, reorganizing, pre payment, etc. are taken at front-office. The front-office dealers keep track of and develop their views on different …
The various functions handled by a bank treasury can be divided as under: (a) Front-office: Dealing – Risk taking (b) Mid-office: Risk Management and Management Information (c) Back-office: Confirmations, Settlements, Accounting and Reconciliation. Favorite
The treasury function in banks was limited to Funds management, i.e., maintaining adequate cash balances to meet day-to-day requirements and deploying surplus funds from operations. The treasury in a bank is also responsible for maintenance of reserve requirements (Cash Reserve Ratio and Statutory Liquidity Ratio). Treasury was considered a service centre and liquidity management was …
Arbitrage The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets. Asset Class Securities with identical risk/reward composition, attributes and features. At-the-money An option contract with identical risk/ reward composition and features. Asset Allocation …
Some Common Treasury Terms – Any of these may be asked in a Treasury Interview Read More »
