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TREASURY AND ASSET LIABILITY MANAGEMENT
1. The risks arise out of mismatch of Assets and Liabilities of the Bank.
2. ALM is defined as protection of net worth of the Bank.
3. Liquidity Risk translates into interest rate risk when the bank has to recycle the deposit funds or role over a credit on market determined terms.
4. Liquidity implies a positive cash flow.
5. The difference between sources and uses of funds in specific time band is known as Liquidity Gap which may be positive or negative.
6. Interest rate risk is measured by the gap between interest rate sensitive asset and interest rate sensitive liability in a given time band.
7. The Assets & Liabilities are rate sensitive when their value changes in reverse direction corresponding to a change in market rate of interest.
8. The Gap management is only way of monitoring ALM.
9. The Duration and Simulation methods are used to make ALM more effective.
10. Derivatives are useful in reducing the Liquidity & Interest rate Risk.
11. Derivatives replicate market movements.
12. Derivatives can be used to hedge high value individual transactions.
13. The Derivative transaction is independent of the banking transaction.
14. Treasury products such as Bonds & Commercial papers are subject to credit risk.
15. Credit Risk in a loan & bond are similar, unlike a loan bond is tradable and hence it is more liquid asset.
16. Now a days the conventional credit is converted into tradable treasury product through Securitisation process by issue of PTC.
17. Securitisation infuses liquidity into the issuing bank & frees blocked capital.
18. Transfer pricing refers to fixing the cost of resources and return on Assets of the bank in a rational manner.
19. In a multi branch transfer pricing is particularly useful to assess the branch profitability.
20. ALM policy prescribes composition of ALCO & operational assets of ALM.
21. Liquidity policy prescribes minimum liquidity to be maintained.
22. Modern banking may be defined as Risk Intermediation.
23. Market Risk comprises of Liquidity and interest rate risk.
24. Banks are highly sensitive to liquidity risk as they can not afford to default or delay in meeting their obligations to depositors and other lenders.
25. Liquidity & interest rate sensitivity gap are measured in specified time bands.
26. Treasury connects core banking activity with financial markets.
27. Derivatives and Options are used in managing the mismatches in bank’s Balance Sheet.
28. Treasury is also responsible for transfer pricing.
29. A situation where depositors of a bank lose confidence in the bank and withdraws their balances immediately is known as Run on the Bank.
30. Securities that can be readily sold for cash in secondary markets are Liquefiable securities.
31. Ratio of interest rate sensitive assets to rate sensitive liabilities is Sensitive Ratio.
32. Capacity and willingness to absorb losses on account of market risk is Risk Appetite.
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