mocb finalest

7/30/2019 MOCB Finalest

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Reshma Soni (201127) Rohit Bhartiya (201133) Samridhi Madan ( 201142)

Abhishek Kumar (053060)

Presentation on Treasury, Investment and Risk Managementin banks


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Introduction


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What are the Functions of Banks?


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Banking involves

ProprietaryServices

Direct Exposure

Risk on theirown Behalf)

Consumerservices

TradingOperation

Bankingoperations


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Among Primary Functions of

Bank(Lending)

Most loans are ILLIQUID

Riskiest Business Assets

Weakens the quality of earning capacity


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Another Major Categories of EarningAssets

Government Bonds

& Notes

Corporate Bonds

& Notes

Other forms of Debtsecurities(CDs, CPs)

Stocks Permitted byLaw(

Investmentsin Securities


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What are the functions of bank security portfolio?


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Stabilize the banksincome

Makes banksbalance sheet lookfinancially stronger

Provide geographic

diversification

Back up source of liquidity

Help hedge bank againstlosses due to interest

rates

Offset Credit riskexposure in the banks

loan portfolio Functions of

BankSecurityPortfolio


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Investment stands betweencash, loans & deposits. How?


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nvestment stan s etween cas ,loans & deposits

Cash low -- Investment sold to raise more cash

Cash high -- Cash placed in investment securities

Loan demand weak -- investment securities rises in bank to

provide more earning asset

Loan demand strong Investment will be sold to accumulateheavy loan demand

If deposits not growing in banks, investment securities again usedas collateral

Thus, Investments has a critical intersection position in the

balance sheet


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Crossroads account on a banks balance sheet

Assets Liabilities

Cash DepositsAdd to

investmentwhen cash is In

excess

Sell investmentswhen loan

demand high

Sell investmentswhen cash

is low

Add toinvestmentswhen loan

demand weak

Investments

Loans

When deposits are low, useinvestment as collateral for

more non-deposit borrowings

Return investment pledge ascollateral to the investment

portfolio when deposit growthis strong

Non- DepositBorrowings


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Expectedreturn and risk

Pledging

requirement-Securities bepledged as

collateral forpublic fund

deposits

Tax exposure


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0

5

10

15

20

25

1 yr 2 yr 3 yr 4 yr 5 yr

The ladder or space maturity policy

% of the value of all securitiesheld

Strategy: Divide investmentportfolio equally among all

maturities acceptable tothe bank

Advantages: Reducesinvestment incomefluctuations/require littlemanaging expertise


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Front end loaded maturity policies

0

10

20

30

40

50

60

70

80

1 yr 2 yr 3 yr 4 yr 5 yr

% in value of all securities held

Strategy: All security

investment are short terms

Advantages: strengthens thebanks liquidity positionand avoids large capitallosses if interest rates rise


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Back end loaded maturity policies

0

5

10

15

20

25

30

35

1 yr 2 yr 3 yr 4 yr 5 yr 6 yr 7 yr 8 yr 9 yr 10 yr


Strategy: All securityinvestments are longterm

Advantages:maximize the banksincome potentialfrom securityinvestment if interestrates fall


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Barbell investment portfolio strategy

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1 yr 2 yr 3 yr 4 yr 5 yr 6 yr 7 yr 8 yr 9 yr 10 yr


20%

30%30%

20%

Strategy: security holdingsare divided between short

terms and long term

Advantages: Helps to meetbanks liquidity need withshort term and achieveearning goals due to higherpotential earnings from longterm portfolio


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A treasury is any place where

currency or items of highmonet ary value

are k ept


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government whichmanages all money

and revenue

funds of agovernment or

institution

A depository wherewealth and

precious objectscan be kept

center of financialoperations within an

organisation

governmentdepartment

responsible forcollecting, managingand spending public

revenues

VariousForms of treasury


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The management of an organization'sliquidity to ensure that the right amount of cash resources are available at the right placein the right currency and at the right time

using right instrument

It maximizes the return on surplus funds,

minimizes the financing cost of the businesscontrol interest rate risk and currencyexposure to an acceptable level.


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The goals sought by the bank from its

investment portfolioGoals

The desired maturity range and degree of marketability (turn into cash immediately)sought for all securities purchased

Maturity range and

degree of marketability

The quality or degree of default risk

exposure the bank is willing to accept.

Risk Exposure

The degree of portfolio diversification toreduce risk the bank wishes to achievewith its portfolio

Portfoliodiversification


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LIMITEDSERVICEGLOBAL

FULLSERVICEGLOBAL

LIMITEDSERVICELOCAL

FULLSERVICELOCAL

Range of services

C e n t r a

l i s a t i o n o f m

a n a g e m e n t c o n t r o

l

F ll S i L l


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Full service Global1. Undertakes most of the Activities

2. Operates as the one treasury for all

markets3. Ultimately combines: a. Poolingrisks and b. Policies or strategies

Full Service Local1. Self-sustained local unit

2. Full range of activities

undertaken3. Guided by the needs of thelocal business

Limited Service Global1. Range of services limited.

Limited Service Local

1. Very small decentralizedtreasury

2. Virtually little or no

treasury activity.

Models of Treasury

Organisation


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Scale or Spread

Focus

Complexity


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Core functions of treasurydepartment-the dealing room, themiddle office and the back-office.


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Core Functions of Treasury Department

Dealing Risk taking

Front-office

Risk Management Management InformationMid-office

Confirmations, Settlements,Accounting and

Reconciliation.Back-office


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Buy, sell and trade inmoney market

instruments, securities,forex, equity, derivatives

and precious metal

Restructuring,reorganizing, pre

payment

Keep track of anddevelop their views on

different asset class,securities, currencies,derivative products

FRONT OFFICE


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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

FRONT OFFICE


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Middle Office

Market risk whicharises on account

of:

- Interest ratemovement

- Foreignexchange rate

movement

- Commodityprices

- Equity prices

Liquidity risk Country risk

Independentmarket risk

Formation of Investment policy

for banks

treasury

Formation of ALM policy for

the bank.

Risk Management and Management Information


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Back office

Co-ordinationwith front-office

Ensuringcompliancewith statedtreasuryproceduresandstipulations

Internalcontrol andcheck andaccounting

Monitoringof SLR/CRR


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BACK-OFFICEOPERATIONS

Riskmanagement

TreasuryAccounting

Documentation

Financials,analysis,budgets

Regulatoryreporting

Systems andTele-

communications

Other functions of back office


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Riskcommittee

Investment

committee

TreasuryMoneymarket

business unit

Asset Liability

ManagementCommittee

Cashreconciliation

Treasuryoperates infinancial

marketdirectly

Treasuryproductsare

marketableand liquid

Treasurycan monitorFXmovements


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Meeting SLRrequirements!


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Sample work flow model in TreasuryDivision- Standard Chartered.

The International Swaps and Derivatives MUREX:


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pAssociation

MUREX:

Murex, the leading provider of integrated trading, riskmanagement and processing

solutions

full representation of the risktaken by their clients.

provide investment advicesdetailed risk analysis of theclient portfolio

what-if analysis on possiblemarket evolutions

market and credit riskmanagement.


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Asset - Liability

Management (ALM)


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Asset Liability Management

Keeping cost of liabilityas low as possible andyield on asset as high

as possible.

Mis-matches betweenliability and asset

should be reduced tominimum.

Assessment of various types of risks andaltering the asset liability-portfolio in adynamic way to manage risks.


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Components of ALM

Assets Management

Liability Management

Risk Management

?


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Monitor Interest margin spread

Manage Interest Rate Risk

Manage Liquidity Risk

Capital Adequacy Risk

Profit planning and growth projection

NEED?


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Spread= Earning on assets Cost of liability

Cannot Charge morethan 4% above Prime

Lending Rate.

Cannot try to giveless interest to

depositors to keepthe cost low

Interest Rate

is marketdriven.

1. Monitoring Interest Rate Spreads


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Particulars As % of total

Rate Cost Particulars As % of total

Rate Yield

OwnedFunds

8 - - Cash in hand 4.5 - -

Borrowings 12 9 1.080 Balance withRBI

8 4 .224

Current

Deposits

5.4 - - Investments 36 11 3.96

SavingsDeposits

17.6 4.5 0.792 Advances uptoRs. 25000

4.2 11 .462

Term 54 10 5.4 Advances uptoRs. 2 lacs

11.5 13.5 1.552

Advancesabove Rs. 2 lacs 14.1 16.75 2.362

Exports 4.7 9 0.423

N.P.A. 13.1 - -

Other Assets 2.5 - -

Total 100 7.272 Total 100 9.039

Yield- Cost = SpreadCost analysis


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If savings interest rates fall then people invest in 15 or 30 days deposits.

If interest rate of long term deposits rise, investment in short term would fall.Yield on advances will go down with fall in interest rates.

As interest rates go up, old deposits will be withdrawn (if premature penalty

is not imposed), and re-invested as per the new rates. It will effect thespread.

Similarly, with securities or investments, rates going up, means newsecurities will be issued with higher coupon and price of existing securitieswill go down

Interest Rate is market sensitive.

2. Managing Interest Rate Risk


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Match Fixed rate liabilities with fixed rate assets. Match Floating rate liabilities with floating rate

assets. Any mismatch will create a gap. Positive gap exists when,

Assets > Liabilities. Negative gap exists when,

Liabilities > Assets.

Matching of borrowings and lending is the solution.

Thus.


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Difficult to haveperfect match

between assetsand liability.

Larger the numberof transactions,larger is the risk .

3. Managing Liquidity Risk


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100 Crores of C.D. @10%Try to create an asset like L.C.

The net return would be 2-3%

However, if not able to create an asset- it invests thatamount in call money market.

It will give 5-6% return.

If it creates asset after some time, then at the time of maturity of C.D. amount would be outstanding.

It will have to go to call money market.


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Gap Analysis

Liabilities Asset GapRs. 2500(Matched)

Rs. 2500(Matched)

Zero

Rs. 5000( Short termmaturity)

Rs. 6000( Short termmaturity)

+1000

Rs. 2500( Long termmaturity)

Rs. 1500( Long termmaturity)

-1000

ALM classifies the securities on the basisof their maturity by Gap Analysis.

Managing Liquidity is an issue!!

4 C i l Ad Ri k


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Growth of assetsdepends on growthof capital.

Growth in Long term depositshave a negative impact onprofit if capital constraintsexist as money has to be

deployed in Zero Risk Govt.Securities (low yield).

Bank suffering from capitalconstraints may not be able

raise further capital frommarket as its performance

parameters may not be good.

Assets carry Risk Weightage.

4. Capital Adequacy Risk


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Global best practices and keyperformance indicators of bank

treasury department.

you cant


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ymanageanything

unless youmeasure it

Revenuegrowth

Revenuemix

Costefficiency

Return onaverageinvestedcapital

Dividendsper sharegrowth

Basicsearning

per share


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Best practices in International TreasuryManagement,1999

1)Finance Structure is centralized Improved cash visibility Greater control Improved efficiency

2)Roles and responsibilities are clearly defined,

with management reporting focused on consistentformat and KPIs.

3)Develop efficient ways to bring companys cash

into investible balance


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4) Minimize expenses in making payments

5) No rookies work in the department

6) Reasonable risk factors are identified and mitigated

7)Partnering with other components of the bank

8)Seeking constant improvement

9) Treasury workstations


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