& asset liability management system
Hendrix Yapputro
to manage asset and liability in a short term (less than 1 year)
Asset Liability Management Approach
Pool of Fund
Short-term debts
Long-term debts
Capital
Primary Reserve
Secondary Reserve
For main liquidity purpose, operational fund, clearing settlement, withdrawal.
For a back-up of Primary Reserve, e.g. Sertifikat Bank Indonesia, Marketable Securities.
Loan For the profitability purpose. (Interest-based Income)
Long-term Investment
For the profitability & fixed-income purpose. E.g. Fixed-Income Investment (or Bond).
Fixed Asset For infrastructure purpose. E.g. office space, office technology
Pool of Fund Approach
Asset Liability Management Approach
Short-term debts
Long-term debts
Capital
Primary Reserve
Secondary Reserve
For main liquidity purpose, operational fund, clearing settlement, withdrawal.
For a back-up of Primary Reserve, e.g. Sertifikat Bank Indonesia, Marketable Securities.
Loan For the profitability purpose. (Interest-based Income)
Long-term Investment
For the profitability & fixed-income purpose. E.g. Fixed-Income Investment (or Bond).
Fixed Asset For infrastructure purpose. E.g. office space, office technology
Conversion of Fund Approach
Goal of Asset Liability Management Net Interest Margin = Interest income (%) - Interest cost (%)
Asset Liability
Asset, 1 year, 12% p.a. Liability, 2 years, 10% p.a.
Case 1 Year 1 Year 2
Asset, 12% p.a. Has to find other loan?
Liabilities 10% p.a. Liabilities 10% p.a.
Gross margin 2% Expense 10%
Case 2 Asset Liability
Asset, 2 years, 12% p.a. Liability, 1 year, 10% p.a.
Year 1 Year 2
Asset, 12% p.a. Loan, 12% p.a.
Liabilities 10% p.a. Has to find other
liabilities
Gross margin 2% ?
Case 3
Interest rate decrease
Case 4
Case n
Find out other funding source
need a system to help to manage the asset &
liabilities
Asset Liability Management Method
Asset Group Liabilities Group
Cash NRSA Money Market liabilities RSL
Marketable Securities RSA Short-term Liabilities RSL
Long-term Securities NRSA Long-term Liabilities NRSL
Short-term Loan RSA Equity RSL
Long-term Loan (variable interest) RSA
Long-term Loan (fixed- interest) NRSA
Other Long-term Asset NRSA
NRSA NRSL
RSL RSA
Negative gap
NRSA NRSL
RSL RSA
Zero gap
NRSA NRSL
RSL RSA
Positive gap
Legend
NRSA Non Rate Sensitive Asset
RSA Rate Sensitive Asset
NRSL Non Rate Sensitive Liabilities
RSL Rate Sensitive Liabilities
1. Re-pricing Method
Changes in Interest Rate 1. Re-pricing Method
Asset RSA NRSA Liabilities RSL NRSL
Cash 50 Short-term liabilities 200
Long -term Securities 150 Long-term Liabilities 250
Short-term Loan 200 Equity
Long-term Loan (Variable-rate Interest) 200 Share 250
Long-term Loan (Fixed-rate Interest) 150 Premium 25
Fixed Asset 50 Retained Earning 75
Total 400 400 Total 200 600
Gap = 400-200
= 200
Relative Gap Ratio = 200 ÷ 800
= 0.25 (or 25%)
Interest sensitivity Ratio= 400 ÷ 200
= 2
Changes in Net Interest Income:
If the spread is 5%, then changes in
the net interest income equals to 10
(200x5%)
Current Gap Changes in
Future Interest
Rate (Δ i)
Changes in
Income due to
Δ i
Positive Gap ↑ ↑
Positive Gap ↓ ↓
Negative Gap ↑ ↓
Negative Gap ↓ ↑
Zero Gap ↑ Zero
Zero Gap ↓ Zero
Asset Liability Management Strategy
1. Defensive Strategy To adjust the changes in the asset & liability volume over the interest rate changes to stay at zero gap position.
2. Aggressive Strategy Current Gap Changes in
Future Interest
Rate (Δ i)
Changes in
Income due to
Δ i
Positive Gap ↑ ↑
Positive Gap ↓ ↓
Negative Gap ↑ ↓
Negative Gap ↓ ↑
Zero Gap ↑ Zero
Zero Gap ↓ Zero
If interest rate ↑, then adjust to Positive Gap
If interest rate ↓, then adjust to Negative Gap
need a system to help to manage the asset &
liabilities
Changes in Interest Rate 2. Maturity Method
Asset $ Liabilities $
$200,000 asset, 5 years, 15% p.a. 179,887.07 $ 360,000 liability, 2years, 15% p.a. 342,442.35
$200,000 asset, 10 years, 15% p.a. 169,887.39 Equity 7,332.10
Total 349,774.46 Total 349,774.46
Asset $ Liabilities $
$200,000 asset, 5 years, 15% p.a. 200,000 $ 360,000 liability, 2years, 15% p.a. 360,000
$200,000 asset, 10 years, 15% p.a. 200,000 Equity 40,000
Total 400,000 Total 400,000
need a system to help to manage the asset &
liabilities
Because of ↓ asset; Equity also ↓ $32,667.90
(40,000 – 7,332.10)
Asset Liability Management Strategy 2. Maturity Method
Asset $ Liabilities $
$200,000 asset, 5 years, 15% p.a. 179,887.07 $ 360,000 liability, 2years, 15% p.a. 342,442.35
$200,000 asset, 10 years, 15% p.a. 169,887.39 Equity 7,332.10
Total 349,774.46 Total 349,774.46
Current Gap Changes in
Future Interest
Rate (Δ i)
Changes in the
Equity due to
Δ i
Positive Gap ↑ ↓
Positive Gap ↓ ↑
Negative Gap ↑ ↑
Negative Gap ↓ ↓
Zero Gap ↑ Zero
Zero Gap ↓ Zero 2. Defensive Strategy
1. Aggressive Strategy
Changes in Interest Rate 3. Duration Method
duration time period
market value of asset
present value of future discounted cash flow
$1000 bond, 3 years, coupon 8%, market interest 10%
Period Cash inflow ($) PV Factor PV Cash inflow PV Cash inflow x
time period
1 80 0.9091 72.73 72.73
2 80 0.8264 66.12 123.32
3 1,080 0.7513 811.40 2,434.21
950.25 2,630.36
Duration = 2.77 years (2,630.36 ÷ 950.25)
Changes in Interest Rate
Asset $ Duration Liability $ Duration
Cash 100 0 Liability (1 year) 600 1
Asset 1 400 1.25 Liability (5 year) 300 5
Asset 2 500 7 Total Debt 900 2.33
Equity 100
Total Asset 1,000 4 Total Liability 1,000
Description Interest Yield Market Value to
Total Asset
Interest to Total
Asset (%)
Change in Net
Income
Interest Revenue
Cash 0 0.1 0
Asset 13 0.9 11.7 11.7
Interest Expense
Liability 11 0.9 9.9 9.9
Net Income 1.8
0.1 = 100 ÷ 1000
0.9 = (400+500) ÷ 1000
0.9 = (600+300) ÷ 1000
0 = (0÷1000) x 100%
11.7% = [(900x13%) ÷] x 100%
9.9% = [(900x11%) ÷] x 100%
1.8 = 11.7 – 9.9
3. Duration Method
Asset Liability Management Strategy 3. Duration Method
If interest rate ↑ 200 point from its initial 11% , then how much $ Equity ↓ ?
Current Gap Changes in
Future Interest
Rate (Δ i)
Changes in the
MV of Equity
due to Δ i
Positive Gap ↑ ↓
Positive Gap ↓ ↑
Negative Gap ↑ ↑
Negative Gap ↓ ↓
Zero Gap ↑ Zero
Zero Gap ↓ Zero 2. Defensive Strategy
1. Aggressive Strategy
Liquidity Measurement & Its Crisis
Reserve
Asset to Liability Ratio
Cash Flow Method
Basic Surplus Method
Liquidity Projection Ratio
Liquidity Index
1. Asset to Liability Ratio > 115%.
2. Very small reserve.
3. Money center.
4. Evergreen loan (very risky in the tight money
policy condition).
5. Very aggressive loan granted (expansion).
6. Secondary reserve is not adequate.
Capital Management
Capital Management
Leverage Ratio
ROE
Internal Capital
Generation Rate
RAROC
EFC
Equine FSI Consulting is an experienced consulting
who has experience in Project Advisory
Some selected projects are:
1. Loan System
a. Lead Management System
b. Loan Origination System
c. Loan Collateral System
d. Loan Management System
e. Loan Collection System
2. Treasury System
3. Asset Liability Management System
4. IFRS System