Liability Management

4 Key excerpts on "Liability Management"

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  eBook - ePub

  Bank Asset Liability Management Best Practice

  Yesterday, Today and Tomorrow

  • Polina Bardaeva(Author)
  • 2021(Publication Date)
  • De Gruyter

    (Publisher)

  2 This definition reflects the sense of ALM as a process, which applies actions to reach the bank’s goals, although it does not define and limit the scope of tasks that are solved by the ALM.

  In contemporary studies and books (after 2002–2006) authors defined asset and Liability Management more precisely, as very often they were basing it on their own experience of practical work in this area. Among the activities that represent asset and Liability Management, the professionals named simultaneously integrated banks’ assets, liabilities, and funds management3 and finding such balance between assets and liabilities that would ensure minimum exposure to price risk,4 management of IRR and liquidity risk, maximization of the bank’s net present value (NPV) and interest income.5

  Regulatory guidelines almost never provide an explicit definition of asset and Liability Management, although there are listed components of ALM: determination, implementation, control, and review of asset and liability strategies with aims of achieving financial goals of an organization taking into account the company risk level and other appropriate constraints.6

  It is recognized that in most of the sources ALM is perceived as a process of coordinated adjustment/changing of assets and liabilities in order to reach their optimal relation, which will ensure fulfillment of banks’ aims and tasks. As far as tasks of risk minimization (including IRR) and income (interest income) generation contradict each other, different authors as a criterion for optimal structure of assets and liabilities suggest either maximization of income at a certain level of risk or minimization of risk as a defined income level. Both criteria seem to be correct and applicable at different times (see Part 1) and according to different circumstances in the market, regulatory environment, and specific conditions for a bank. Thus, asset and Liability Management in general can be defined as a process of modelling balance sheet and off-balance items and changing their volumes and decomposition in order to achieve banks’ goals and targets in different macro-environments and in line with specific banks’ resource profile, as well as to fulfill external and internal risk limitations and constraints on liquidity, interest rate, FX risks, and capital adequacy

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  Law and Practice of Liability Management

  Debt Tender Offers, Exchange Offers, Bond Buybacks and Consent Solicitations in International Capital Markets

  • Apostolos Ath. Gkoutzinis(Author)
  • 2014(Publication Date)
  • Cambridge University Press

    (Publisher)

  1 Liability Management for issuers of debt securities: Summary of options and legal framework 1 Introduction As the issuer of debt securities in the capital markets and its advisors are preparing for the customary celebratory closing dinner following the issuance of the securities to investors and the successful completion of an intense and (probably) expensive capital markets project, a Liability Management transaction for those same securities is probably the last thing on their minds. It is entirely unromantic for any newly wedded couple to be discussing the advantages and disadvantages of a divorce or going through the provisions of a nuptial agreement as they are boarding a flight, holding hands, to their honeymoon destination. And yet, hon- eymoons never last forever and marriages often come to a sudden end as well. For the issuer of debt securities that had once been issued and celebrated with a lot of fanfare, the equivalent of a messy divorce from its hapless investors takes the form of a Liability Management transac- tion against the background of the issuer’s or its controlling sharehold- ers’ new financing or strategic plans and, in the worst case, against the background of considerable financial stress and the risk or the reality of bankruptcy. No issuer of debt securities is protected forever from competitive mar- ket forces and external economic shocks. The issuer’s (hitherto seem- ingly robust) financial and business plan may become entirely fanciful or require substantial revision as a result of tougher economic and finan- cial conditions, structural changes, limited financing options, poor prof- itability, rising costs, and/or volatile macroeconomic environments in the issuer’s main markets. Often, issuers with fundamentally sound businesses and operations may suffer from lack of liquidity, working capital, and/or long-term funding.

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  eBook - ePub

  The Money Markets Handbook

  A Practitioner's Guide

  • Moorad Choudhry(Author)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 7 Asset and Liability Management

  As part of our discussion on the money markets, we will consider in this chapter a major part of banking activity, and one that is closely related to the main business of banking, which is the subject of asset and Liability Management. The art of asset and Liability Management (ALM) is essentially one of risk management and capital management, and although the day-today activities are run at the desk level, overall direction is given at the highest level of a banking institution. The risk exposure in a banking environment is multi-dimensional, for example they encompass interest-rate risk, foreign-exchange risk, liquidity risk, credit risk and operational risk. Interest-rate risk is one type of market risk. Risks associated with moves in interest rates and levels of liquidity1 are those that result in adverse fluctuations in earnings levels due to changes in market rates and bank funding costs. By definition, banks’ earnings levels are highly sensitive to moves in interest rates and the cost of funds in the wholesale market. Asset and Liability Management covers the set of techniques used to manage interest rate and liquidity risks; it also deals with the structure of the bank’s balance sheet, which is heavily influenced by funding and regulatory constraints and profitability targets.

  In this chapter we review the concept of balance sheet management, the role of the ALM desk, liquidity risk and maturity gap risk. We also review a basic gap report. The increasing use of securitisation

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  Financial Theory: Perspectives From China

  Perspectives from China

  • Xingyun Peng(Author)
  • 2015(Publication Date)
  • WCPC

    (Publisher)

  The basic idea behind the theory of expected income is that the liquidity status of commercial banks is, in the final analysis, based on future income and is positively related to the income. As long as future income is guaranteed, long-term project loans and consumer loans can ensure bank liquidity so long as they are repaid in installments. Conversely, if future income cannot be guaranteed, even short-term loans run the risk of default. Therefore, this theory states that commercial banks should use the future income of borrowers as a standard measurement of their ability to repay loans so as to coordinate profitability with liquidity and safety. The expected income theory also states that the time and amount of borrower income can be expected if a portion of income is used to repay the loans each period, it will not only guarantee loan repayment, but also ensure the amount and time of repayment. If the payment is made in installments, even a long-term loan will often be accompanied with liquidity during the duration of the loan.

  8.2.2Liability Management

  (a) Main Contents of Liability Management

  Liability business is the basis of bank assets. For this reason, Liability Management is much more important to banks than it is to industrial and commercial enterprises. The basic content of bank management of liability business is to find a stable source of financing at a low cost. Drawing deposits, borrowing from the central bank, borrowing from the interbank lending market and issuing financing bonds are the primary means by which banks obtain funding, although the majority of bank liability funds come from deposits. For this reason, the key to bank liability business management is the means by which more deposits can be drawn.

  Capital management is a major element of modern bank Liability Management. There are three primary uses for bank capital: absorbing operating losses including risk losses, ensuring normal bank operations, allowing some time for the bank management to resolve existing issues, and providing a buffer to avoid bankruptcy. Adequate capital will assist in boosting public confidence in the banks and displaying the strength of the bank to its creditors. The more the bank capital, the more confident will depositors become. The capital adequacy ratio calculated on the basis of regulatory capital is an important tool for regulatory authorities to control banks’ risk-taking behaviors and guarantee the stable operation of the market. Therefore, the higher the risk the bank capital is exposed to, the higher is the capital requirement the regulators demand. The capital adequacy requirement may, to some extent, prevent commercial banks from taking excessively risky behaviors in their portfolio choices.

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