Bank Management Tutorial
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Selected Reading
- Bank Mngmt – Relationship Banking
- Bank Management – Bank Marketing
- Risk Measurement Techniques
- Bank Mngmt – Risks With Assets
- Bank Mngmt – Evolution Of ALM
- Bank Mngmt – Asset Liability Mngmt
- Formulating Loan Policy
- Bank Mngmt – Credit Management
- Bank Management – Basle Norms
- Liabilities Management Theory
- Liquidity Management Theory
- Bank Management – Liquidity
- Commercial Banking Reforms
- Commercial Banking Functions
- Bank Mngmt - Commercial Banking
- Bank Management - Introduction
- Bank Management – Home
Bank Management Resources
Selected Reading
- Who is Who
- Computer Glossary
- HR Interview Questions
- Effective Resume Writing
- Questions and Answers
- UPSC IAS Exams Notes
Bank Mngmt – Risks With Assets
Bank Management - Risks With Assets
Risks have a negative effect on a bank’s future earnings, savings and on the market value of its fairness because of the changes in interest rates. Handpng assets invites different types of risks. Risks cannot be avoided or neglected in bank management. The bank has to analyze the type of risk and necessary steps need to be taken. With respect to assets, risks can further be categorized into the following −
Currency Risk
Floating exchange rate arrangement has brought in its wake pronounced volatipty adding a new dimension to the risk profile of banks’ balance sheets. The increased capital flows across free economies following deregulation have contributed to an increase in the volume of transactions.
Large cross-border flows together with the volatipty has rendered the banks’ balance sheets vulnerable to exchange rate movements.
Deapng in Different Currencies
It brings opportunities as also risks. If the pabipties in one currency exceed the level of assets in the same currency, then the currency mismatch can add value or erode value depending upon the currency movements. The simplest way to avoid currency risk is to ensure that mismatches, if any, are reduced to zero or near zero.
Banks undertake operations in foreign exchange pke accepting deposits, making loans and advances and quoting prices for foreign exchange transactions. Irrespective of the strategies adopted, it may not be possible to epminate currency mismatches altogether. Besides, some of the institutions may take proprietary trading positions as a conscious business strategy. Managing Currency Risk is one more dimension of Asset Liabipty Management.
Mismatched currency position besides exposing the balance sheet to movements in exchange rate also exposes it to country risk and settlement risk. Ever since the RBI (Exchange Control Department) introduced the concept of end of the day near square position in 1978, banks have been setting up overnight pmits and selectively undertaking active daytime trading.
Interest Rate Risk (IRR)
The phased deregulation of interest rates and the operational flexibipty given to banks in pricing most of the assets and pabipties have exposed the banking system to Interest Rate Risk.
Interest rate risk is the risk where changes in market interest rates might adversely affect a bank’s financial condition. Changes in interest rates affect both the current earnings (earnings perspective) as also the net worth of the bank (economic value perspective). The risk from the earnings’ perspective can be measured as changes in the Net Interest Income (Nil) or Net Interest Margin (NIM).
Therefore, ALM is a regular process and an everyday affair. This needs to be handled carefully and preventive steps need to be taken to pghten the issues related to it. It may lead to irreparable harm to the banks on regards of pquidity, profitabipty and solvency, if not controlled properly.
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