Asset Liability Management at-final

ASSET-LIABILITY MANAGEMENT AT

STANDARD CHARTERED BANK

Darshana Pratap (09MBA016)Chandni Mariann Thomas (09MBA015)

Standard Chartered Bank

• The Standard Chartered Group is an international banking and financial services group particularly focused on the markets of Asia, Africa and the Middle East

• Indian branch operations are conducted in accordance with the banking license granted by the Reserve Bank of India

Risk Management Framework of SCB

• The Group’s Risk Management Framework (RMF) identifies the risk types to which the Group is exposed, each of which is controlled by a designated risk type owner (RTO). The major risk types are described individually in the sections below. The RTOs, who are all approved persons under the FSA regulatory framework, have responsibility for establishing minimum standards and for implementing governance and assurance processes. The RTOs report up through specialist risk committees to the GRC or GALCO.

• The Group Asset and Liability Committee (GALCO), through its authority delegated by the court, is responsible for the management of capital ratios and the establishment of, and compliance with, policies relating to balance sheet management, including management of the Group’s liquidity, capital adequacy and structural foreign exchange rate risk.

• The Group Pensions Executive Committee, through its authority delegated by the court, is responsible for the management of pension risk.

• The Group Risk Committee (GRC), through its authority delegated by the court, is responsible for the management of all other risks, including the establishment of, and compliance with, policies relating to credit risk, country risk, market risk, operational risk, regulatory risk and reputational risk. The GRC is also responsible for defining the Group’s overall risk management framework.

• The GRC is chaired by the Group chief risk officer (GCRO). The GALCO is chaired by the Group finance director.

• The Audit and Risk Committee (ARC), whose members are all non-executive directors of the Company, reviews specific risk areas and monitors the activities of the GRC and GALCO. The ARC receives regular reports on risk management, including the Group’s portfolio trends, policies and standards, adherence with internal controls, regulatory compliance, liquidity and capital adequacy, and is authorized to investigate or seek any information relating to an activity within its terms of reference.

• Risk limits and risk exposure approval authority frameworks are set by the GRC in respect of credit risk, country risk and market risk. The GALCO sets the approval authority framework in respect of liquidity risk. Risk approval authorities may be exercised by risk committees or authorized individuals.

• Liquidity risk management policy is approved by GALCO (Group Asset and Liability Committee).

• The Liquidity Management Committee (LMC) receives authority from the GALCO and is responsible for setting liquidity limits and proposing liquidity risk policies and practices.

Asset Liability Management

• ALM is a practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank

• It is a dynamic process of Planning, Organizing & Controlling of Assets & Liabilities- their volumes, mixes, maturities, yields and costs in order to maintain liquidity

• Asset Liability management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk faced by banks

• The main objective of ALM is to manage Net interest margin.

• The net difference between interest earning assets (loans) and interest paying liabilities (deposits) to produce consistent growth in the loan portfolio and shareholder earnings, regardless of short-term movement in interest rates.

• Net interest income = (interest revenue – interest expense)

Liquidity Risk

• Liquidity risk is the risk that the bank do not have sufficient financial resources available to meet all their obligations and commitments as they fall due, or can only access these financial resources at excessive cost.

Liquidity Risk Policy at SCB

• To maintain adequate liquidity at all times, in all geographic locations and for all currencies, and hence to be in a position to meet all obligations as they fall due.

• Short-term, the focus is on ensuring that the cash flow demands can be met through asset maturities, customer deposits and wholesale funding where ever required.

• Medium-term, the focus is on ensuring the balance sheet remains structurally sound.

Liquidity Management

• The GALCO is the responsible governing body that approves the liquidity management policies.

• The Liquidity Management Committee (LMC) receives authority from the GALCO and is responsible for setting liquidity limits and proposing liquidity risk policies and practices.

• Liquidity in each country is managed by the Country ALCO within the pre-defined liquidity limits set by the LMC and in compliance with Group liquidity policies and local regulatory requirements.

• Each ALCO is responsible for ensuring that the country is self-sufficient, able to meet all its obligations to make payments as they fall due, and operates within the local regulations and liquidity limits set for the country.

Policy and Procedure

Liquidity risk management framework requires limits to be set for prudent liquidity management. There are limits on:

• The mismatch in local and foreign currency behavioural cash flows

• The level of wholesale borrowing to ensure that the size of this funding is proportionate to the local market and our local operations

• Commitments, both on and off balance sheet, to ensure there are sufficient funds available in the event of drawdown on these commitments

• The advances to deposits ratio to ensure that commercial advances are funded by stable sources and that customer lending is funded by customer deposits

• The amount of medium-term funding to support the asset portfolio

• The amount of local currency funding sourced from foreign currency sources

Committee Structure

• At country level, capital is maintained on the basis of the local regulator's requirements. It is overseen by the country Asset and Liability Committee (ALCO), which is responsible for managing the country balance sheet, capital and liquidity, with the active support and guidance from Group ALCO

• The Asset and Liability Committee (ALCO) in each country monitors trends in the balance sheet and ensures that any concerns that might impact the stability of these deposits are addressed effectively.

• The ALCO also reviews balance sheet plans to ensure that projected asset growth is matched by growth in the stable funding base.

ALCO• The ALCO is a decision making unit responsible for balance sheet planning from risk

-return perspective including the strategic management of interest rate and liquidity risks.

• The business and risk management strategy of the bank should ensure that the bank operates within the limits / parameters set by the Board. The business issues that an ALCO would consider, will include product pricing for both deposits and advances, desired maturity profile of the incremental assets and liabilities, etc.

• In addition to monitoring the risk levels of the bank, the ALCO should review the results of and progress in implementation of the decisions made in the previous meetings.

• The ALCO would also articulate the current interest rate view of the bank and base its decisions for future business strategy on this view. In respect of the funding policy, for instance, its responsibility would be to decide on source and mix of liabilities or sale of assets. Towards this end, it will have to develop a view on future direction of interest rate movements and decide on a funding mix between fixed vs floating rate funds, wholesale vs retail deposits, money market vs capital market funding, domestic vs foreign currency funding, etc

Statement of Structural LiquidityAll Assets & Liabilities to be reported as per their maturity profile into 8 maturity Buckets:

i. 1 day

ii. 2 to 7 days

iii. 8 to 14 days

iv. 15 to 28 days

v. 29 days and up to 3 months

vi. Over 3 months and up to 6 months

vii. Over 6 months and up to 1 year

viii. Over 1 year and up to 3 years

ix. Over 3 years and up to 5 years

x. Over 5 years

Time Maturity Bucket Used By SCB

Three months and lessBetween three months and one yearBetween one year and five yearsMore than five years