ASSET & LIABIITY MANAGEMENT pdf

[...]... any impact on assets or liabilities 3 ASSET AND LIABILITY MANAGEMENT (with the exception of the fee paid to the bank), it is referred to as an offbalance sheet transaction Some of these contracts will be discussed in Stages 13 and 16 >Asset and liability management To control profitability and risks, banks have set up an asset liability committee (ALCO) It usually includes the very senior management of... discussed: G shareholder value creation; G profit centre management; G risk-adjusted performance management; G pricing credit risk and loan provisioning; G the management of interest rate and liquidity risks > The learning methods Very much as the Tour de France takes cyclists stage by stage to the Champs Elysées in Paris, Asset & Liability Management is divided into 17 stages represented on a map.. .ASSET AND LIABILITY MANAGEMENT Although tools could be introduced in a complex mathematical manner, the presentation in the book is kept intuitive and simple by using modern visual educational techniques > Contents Asset & Liability Management incorporates the modern techniques used in profitability and risk management of a commercial bank Five interrelated... more precise information and a complete asset and liability management system becomes an absolute necessity KEY POI NTS ➨ Banks have three main sources of funds: deposits collected from clients, interbank deposits and shareholders’ equity ➨ Banks invest in five major assets: reserves with the central bank, loans, interbank loans, bonds and fixed assets ➨ The asset liability committee (ALCO) controls... head of accounting and control Some banks refer to this committee as GALCO (group asset liability committee) or ALMAC (asset liability management and action committee) Although the tasks involved – profit and risk control – are not new, the allocation of information, responsibility and accountability to the very senior management is a more recent phenomenon, imposed by the central bank in some countries... organization may nominate a ‘mentor’ to guide you through the learning xi > 1 stage BANKING SERVICES AND BALANCE SHEET 1 1 ASSET AND LIABILITY MANAGEMENT You have just been hired by e-Bank as chief financial officer (CFO) One of your main tasks is to supervise the asset and liability management system that is the control of profitability and risks at e-Bank On your first day at work, you would like to... which are the major economic drivers of e-Bank’s return on equity a) The average earnings-on-assets (EOA) calculated as: EOA = (interest income + fees – provisions)/total assets EOA = (90 + 30 – 10) / 1100 = 10% As the term indicates, the earnings-on-assets ratio measures the average revenue per dollar of asset. 1 b) The average cost of debt (COD) calculated as: COD = interest expenses/total debt COD... – t) + (EOA – COD – OE) × (debt/equity) × (1 – t) EOA = (interest income + fees – provisions)/total assets OE ratio = Operating expenses/total assets Margin = EOA – COD Leverage = debt/equity Tax =t >Note: ROE breakdown Let us assume that: A = Total assets D = Total debt E = equity EOA = Earnings on assets COD = Cost of debt OE = Operating expenses t = Corporate tax rate ROE = Profit after tax/equity... as: OE ratio = operating expenses/total assets OE = 22 /1100 = 2% This ratio indicates the level of non-interest expense per dollar of assets As banking is a service industry, a large part of these expenses includes wages.2 d) The average corporate tax rate (t) calculated as: Average tax rate (t) = taxes/profit before tax t = 7.2 / 18 = 40% 1 When the volume of assets changes substantially over the year,... sheet (31 December, 2000) $ million Assets Reserves with central bank Loans Interbank loans Government bonds Fixed assets Total 40 500 300 230 30 ––––– 1100 Liabilities and shareholders’ equity Deposits 800 Interbank deposits 200 Equity Total 100 ––––– 1100 You will notice that the equity of a commercial bank is a small part of the sources of funds, while the fixed assets (buildings and equipment, computers) . the books you'd like to find, you can visit us at www.business-minds.com For other Pearson Education publications, visit http://www.pearsoned-ema.com > ASSET & LIABILITY MANAGEMENT A. Challenge. vi > CONTENTS Acknowledgments page viii Introduction ix > Stage 1 Banking services and balance sheet 1 > Stage 2 Value creation for shareholders 5 > Stage 3 ROE breakdown 11 > Stage. rate risk (3): the value of equity at risk 91 > Stage 15 The control of liquidity risk 97 > Stage 16 Options 101 > Stage 17 Asset and liability management: an art, not a science 107 Appendix