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Asset and Liability Management

Project Report


Asset and Liability Management In


Submitted To : Submitted By:

Prof. Saikumar.M
Roll No. 56


Asset and Liability Management

The project report in the Area of Specialization – Finance is submitted in March 2011 to
K. J. Somaiya Institute of Management Studies & Research, Mumbai in partial
fulfillment of the requirement for the award of the degree of Master of Management
Studies (M.M.S) affiliated to the University of Mumbai.

Submitted to

Prof K.S. Ranjani



Roll No: 56

Asset and Liability Management


This is to certify that project entitled “Asset and Liability Management in Banks” is

submitted in March 2004 to K. J. Somaiya Institute of Management Studies & Research

by Saikumar.M, Roll No 156 in partial fulfillment on the requirements of the awards of

the degree of Master of Management Studies (M.M.S) affiliated to the University of

Mumbai for the batch of 2003 - 05

Prof K.S.Ranjani

(Project Guide)

Asset and Liability Management


This is to express my earnest gratitude and extreme joy at being bestowed with an

opportunity to get an opportunity to get an interesting and informative project. It is

impossible to thank all the people who have helped me in completion of project, but I

would avail this opportunity to express my profound gratitude and indebtness to the

following people.

I am extremely grateful to my project guide and co-coordinator Prof K.S.Ranjani who has

given an opportunity to work on such an interesting project. He proved to be a constant

source of inspiration to me and provided constructive comments on how to make this

report better. Credit also goes to my friends whose constant encouragement kept me in

good stead. Lastly without fail I would thank all my faculties for providing all explicit

and implicit support to me during the course of my project.


Roll no: 156

Asset and Liability Management

Executive Summary

Asset and Liability management is the co-ordination of the asset and liability portfolios in

order to maximize bank profitability. Its objectives are planning to meet needs for

liquidity, matching the maturities and rate structures of assets and liabilities to limit their

exposure to interest rate risk and maximizing the bank’s spread between interest costs

and interest earnings.

So the report would essentially explain in an elaborated fashion what is asset/liability

management and what are the various strategies which are available to do the same. Also

the report would cover the purposes of liquidity and its various types, which are the risks

involved in it and what effect does it have on the bank’s assets and liabilities. What is the

nature and objectives of liability management and how a bank’s liquidity needs are

estimated. The report will cover which are the various types of funding instruments for

the bank. In this context the concept of yields on fixed income securities

and the relationship between yield and price will also be ascertained and the concept of

yield curve will also be explained. This will also include how yield curves can be used to

anticipate changes in market rates and how yield spreads can be used to choose between

securities of like maturity. The various investment instruments for a bank like the various

types of money market instruments and the risks involved in the same.

The report will also cover the nature of the primary and secondary markets in which the

securities owned by the banks are traded and the role of underwriters and dealers in

primary and secondary securities markets. The types of market information that banks

can obtain from the external sources and through internal market analysis tools. Also the

Asset and Liability Management
purposes of liquidity account and the characteristics of the assets held by it will also be

covered. The investment portfolio policy of banks and the various strategies and

procedures for establishing and reviewing investment portfolio policy, the types of

maturity strategies used in the investment account will also be covered.

Asset and Liability Management
Table of Contents

Particulars Page No
1 What is Asset Liability Management (ALM) 7
2 Asset and Liability Management Strategy 10
3 Strategic Approaches to ALM
Spread Management 12
Gap Management 13
Interest Sensitivity Analysis 17
4 Liquidity 18
5 Liquidity Risk Management (LRM) 21
Trends in LRM 22
Best Practices in marketing Liquidity Risk 25
Other Best practices 36
6 Liability Management 39
Objectives 40
Benefits 41
Risks involved 42
7 Yield Curve 43
Types of Yield Curve 44
Credit Spread 47
Price Yield Relationship 49
Calculating Yield to maturity 52
Calculating Yield to call and put 56
8 Indian Money Market 58
Money Market Instruments 59
9 Primary and Secondary Markets 62
Underwriters in primary markets 63
1 Asset management and Liquidity Account 64
1 Investment Portfolio Policy 68
Elements of Investment Policy 69

Asset and Liability Management


Asset/ liability management (ALM) is a tool that enables bank managements’ to take

business decisions in a more informed framework. The ALM function informs the

manager what the current market risk profile of the bank is and the impact that various

alternative business decisions would have on the future risk profile. The manager can

then choose the best course of action depending on his board's risk appetite.

Consider for example, a situation where the chief of a bank’s retail deposit

mobilization function wants to know the kind of deposits that the branches should be

told to encourage. To answer this question correctly he would need to know inter alia

the existing cash flow profile of the bank. Let us assume that the structure of the

existing assets and liabilities of the bank are such that at the aggregate the maturity of

assets is longer than maturity of liabilities. This would expose the bank to interest rate

risk (if interest rates were to increase it would adversely affect the banks net interest

income). In order to reduce the risk the bank would have to either reduce the average

maturity of its assets perhaps by decreasing its holding of Government securities or

increase the average maturity of its assets, perhaps by reducing its dependence on

call/money market funds. Thus, given the above information on the existing risk

profile of the bank, the retail deposits chief knows that the bank can reduce its future

risk by marketing its long-term deposit products more aggressively. If necessary he

may offer increased rates on long-term deposits and/or decreasing rates on the shorter

term deposits.

Asset and Liability Management
The above example illustrates how correct business decision making can be added by

the interest rate risk related information. The real world of banking is of course more

complicated. The risk related information is just one of many pieces of information

required by a manager to take decisions. In the above example itself the retail deposits

chief would also have considered a host of other factors like competitive pressures,

demand and supply factors, impact of the decision on the banks retail lending

products, etc before taking a final decision. The important thing, however, is that ALM

is a tool that encourages business decision making in a more disciplined framework

with an eye on the risks that the bank is exposed to. ALM is thus a comprehensive and

dynamic framework for measuring, monitoring and managing the market risks, ie

liquidity interest and exchange rate risks of a bank. It has to be closely integrated with

the bank’s business strategy as this affects the future risk profile of the bank.

This framework needs to be built around a foundation of sound methodology and

human and technological infrastructure. It has to be supported by the board's risk

philosophy, which clearly specifies the risk policies and tolerance limits.

ALM is a term whose meaning has evolved. It is used in slightly different ways in

different contexts. ALM was pioneered by financial institutions, but corporations now

also apply ALM techniques.

Traditionally, banks and insurance companies used accrual accounting for essentially all

their assets and liabilities. They would take on liabilities, such as deposits, life insurance

policies or annuities. They would invest the proceeds from these liabilities in assets such

as loans, bonds or real estate. All assets and liabilities were held at book value. Doing so

Asset and Liability Management
disguised possible risks arising from how the assets and liabilities were structured.


Some banks had the traditional deposit base and were also capable of achieving

substantial growth rates in deposits by active deposit mobilization drive using their

extensive branch network. For such banks the major concern was how to expand the

assets securely and profitably. Credit was thus the major key decision area and the

investment activity was based on maintaining a statutory liquidity ratio or as a function of

liquidity management. The management strategy in such banks was thus more biased

towards asset management.


Some banks on the other hand were unable to achieve retail deposit growth rates since

they did not have a wide branch network. But these banks possessed superior asset

management skills and hence could fund assets by relying on the wholesale markets

using Call money, CD’s Bill Rediscounting etc. Deregulation of interest rates coupled

with reforms in the money market introduced by the reserve bank provided these banks

with the opportunity to compete with funds from the wholesale market using the pricing

strategy to achieve the desired volume, mix and cost. So under the Liability management

approach, banks primarily sought to achieve maturities and volumes of funds by flexibly

changing their bid rates for funds.

Asset and Liability Management


As interest rated in both the liability and the asset side were deregulated, interest rates in

various market segments such as call money, CD’s and the retail deposit rates turned out

to be variable over a period of time due to competition and the need to keep the bank

interest rates in alignment with market rates. Consequently the need to adopt a

comprehensive Asset- liability strategy emerged, the key objectives of which were as


 The volume, mix and cost/return of both liabilities and assets need to be planned and

monitored in order to achieve the bank’s short and long term goals.

 Management control would comprehensively embrace all the business segments like

deposits, borrowing, credit, investments, and foreign exchange. It should be

coordinated and internally consistent so that the spread between the bank’s earnings

from assets and the costs of issuing liabilities can be maximized.

 Suitable pricing mechanism covering all products like credit, payments, custodial

financial advisory services should be put in place to cover all costs and risks.


 Spread Management: This focuses on maintaining an adequate spread between a

bank’s interest expense on liabilities and its interest income on assets.

 Gap Management: This focuses on identifying and matching rate sensitive assets

and liabilities to achieve maximum profits over the course of interest rate cycles.

Asset and Liability Management
 Interest Sensitivity Analysis: This focuses on improving interest spread by testing the

effects of possible changes in the rates, volume, and mix of assets and liabilities,

given alternative movements in interest rates.

These strategies attempt to closely co-ordinate bank assets and liability management so

that bank’s earnings are less vulnerable to changes in interest rates. We will now look at

each of these strategies in a more detailed fashion.

 Spread Management

This focuses on maintaining an adequate spread between a bank’s interest rate exposure

on liabilities and its interest rate income on assets to ensure an acceptable profit margin

regardless of interest rate fluctuations. Thus spread management aims to reduce the

bank’s exposure to cyclical rates and to stabilize earnings over the long term and in order

to achieve this banks must manage the maturity, rate structure and risks in iots portfolios

so that assets and liabilities are more or less affected equally by interest rate cycles.

Maturities on assets and liabilities are either matched or unmatched. If they are matched

then the bank knows what it must pay for deposits and borrowed funds and what it will

earn on loans and investments. If maturities are unmatched then assets and liabilities will

mature at different times and in this case management cannot lock in a spread because

funds must be reinvested as assets mature and funds must be borrowed as liabilities

mature at rates that may differ from current market rates.

Co-coordinating rate structure among assets and liabilities is a second most important

aspect of spread management because rate structure and maturity combined determine

interest sensitivity in assets and liabilities. For rate structure, the rates paid and earned on

Asset and Liability Management
fixed- rate assets and liabilities are not sensitive to changes in market rates because their

rates are fixed for the term of the instrument’s maturity. Variable rate assets and

liabilities are interest sensitive because their earnings fluctuate with changing market


Risk of default is the third aspect of assets and liabilities that must be coordinated in

spread management. A bank assumes greater risk of default in its asset portfolios than it

can in its liability portfolios since the depositor’s funds need to be protected. Therefore

balancing the default risk against the benefit of probable returns by assuming some risk to

maintain a profitable spread is vital.

Because it is difficult to forecast future rate and yield changes accurately, many banks try

to match their rate sensitive assets to their rate sensitive liabilities. This approach will

lead to controlled but steady growth and a gradual increase in average profitability.

 Gap Management

Gap mangement is based on the following rate mix classifications:

 Variable: Interest bearing assets and liabilities whose rates fluctuate with general

money market conditions.

 Fixed: Interest bearing assets and liabilities with a relatively fixed rate over an

extended period of time.

 Matched: Specific sources and uses of funds in equal amounts that have

predetermined maturities.

By defenition, gap is the amount by which the rate sensitive assets exceed the rate

Asset and Liability Management
sensitive liabilities. The gap indicates the dollar amount of funds available to fund the

variable rate assets with variable rate liabilbities. Gapa measurement allows the

management to evaluate the impact the various interest rate changed will have on


The objective of gap management is to identify fund imbalances. For example, If rates

are declining and the banks have an excess of variable rate assts over fixed rate liabilities

the bank’s rate will narrow and interest rate margin will be reduced. On the other hand if

rates are increasing and variable rate assets exceed fixed rate liabilities the bank’s rate

will widen and interest margin will increase.

The gap is really a measurement of the bank’s balance sheet sensitivity to changes in the

interest rates ,expressed as a ratio of the rate sensitive assets to rate sensitive liabilities.

The greatest stability occurs when rate sensitive assets equal rate sensitive liabilities or a

ratio of 1.

The matched gap in the fig illustrates this position. In general, with this ratio the bank’s

earnings should remain the same regardless of the interest rate changes because equal

amount of assets and liabilities will be repriced.

Then the sensitivity ratio is greater than 1, the bank has a positive gap, or is asset

sensitive. This position is illustrated by the second gap in exhibit. If interest rates rise, the

bank will benefit as more assets than liabilities are repriced at higher rates. Conversely, if

rates fall the bank’s margin will be negatively affected as more assets than liabilities will

be repriced at lower rates.

Asset and Liability Management

Diagram(interest sensitivity gap)


Matched Gap

Variable Rate Variable Rate

Fixed Rate Fixed Rate

Matched Matched

Positive Gap

Variable Rate Variable Rate………

Fixed Rate Fixed Rate GAP

Matched Matched

Negative Gap

Variable Rate Variable Rate

Fixed Rate Fixed Rate GAP

Matched Matched

Asset and Liability Management

When the sensitivity ratio is less than 1, the bank has a negative gap or is liability

sensitive. This position is illustrated in the figure’s final gap illustration. If interest rates

fall the bank will be benefited as more assets than liabilities will be repriced at lower

rates. Conversely, if interest rates rise the bank’s margin will be negatively affected as

more assets than liabilities will be repriced at lower rates. The impact on earnings from a

rate change with a particular sensitivity position are generalizations and that a change in

asset/liability mix and interest spread may affect the bank’s margin either positively or

negatively, regardless of the gap position and the change in interest rates.

For example, assume that the bank is in matched position holding variable rate assets (90

day prime rate loans) and variable rate liabilities (90 day CDs) with an interest spread of

2%. Now assume that the general level of rates rise by 1%. But because business credit

demand is up, banks are borrowing more money to finance loan growth. Due to this the

CD rates have risen to 9.5% thereby reducing the interest spread to 1.5%. Although the

bank is in matched position and identical amounts of assets and liabilities are repriced the

interest-spread narrows resulting in lower earnings.

In gap management, the absolute size of the gap must be controlled to optimize the fixed

and variable asset/liability relationships throughout a complete interest rate cycle.

Similarly stated, the gap position must be managed to expand and contract with rate cycle


Asset and Liability Management


This is an extension of gap management. It attempts to improve the interest spread by

testing the effects of changes in rates, volume, and mix of assets and liabilities given

alternative movements in interest rates. In this analysis, the bank plans from a given point

in time and projects possible changes in its income statement that might result if changes

are made in the balance sheet. Such changes are then tested against scenarios of rising

rates and falling rates for periods ranging from two weeks to one year.

The analysis begins by separating the bank’s balance sheet into fixed rate and variable

rate components. The interest rate and margin are identified in the current year. The next

step lists the various assumptions that involve the rate, mix, and volume of the bank’s

portfolios- for example, projected increases in the volume of loans, consumer time

deposits, and larger CD’s, as well the current rates on these instruments. The remaining

key assumptions reflect the possible alternative directions in which the rates may move.

The bank then tests the effect of assumed changes in the volume and composition of its

portfolios against both interest rate scenarios (rising and falling rates) to determine their

impact on interest spread and margin.

However if the bank’s assets and liabilities are unmatched, the bank’s earnings can be

protected or improved by planning courses of action in advance for periods of rising and

falling rates.

Hedging with futures trading is a final strategy that can be used to protect against

exposure to interest rate risk if the bank’s interest sensitive assets and liabilities are

Asset and Liability Management
unmatched. Banks can use futures contracts as tools of ALM by selling futures ( a short

hedge) or buying futures (a long hedge). If the bank is in an unmatched position in which

the interest sensitive assets are funded by fixed rate liabilities, it makes a long hedge. If

the position is one of fixed rate assets funded by interest sensitive liabilities the bank

makes a short hedge. The ability to use hedging effectively to offset risk in an unmatched

position require that the future course of interest rate levels be predicted accurately.

 Liquidity (or Marketability):

It is the ease with which you can turn your investment quickly into cash, at or near the

current market price. Some securities, such as mutual funds, offer liquidity by allowing

investors to redeem their securities (return them to the issuer) on short notice. For non-

redeemable securities, liquidity will depend on the owner's ability to sell the securities to

other investors in the open market. Listing on a stock exchange may help, but does not

guarantee liquidity. With some securities, law or contract from reselling the securities for

months or even years may restrict investors, or they may find that there is no market for

the securities when they want to sell.

Liquidity risk management techniques are constantly evolving. Customers today

increasingly use banks as a means to access the payments system and, consequently,

maintain minimal transaction balances. This has resulted in a situation where all banks

are facing high loan demand while their core deposits continue to erode. Most

multinational and regional banks turned to wholesale funding sources to fund asset

growth years ago; we are now seeing small banks being forced to turn to alternative

funding sources, such as subordinated debt, Government Home Loan, Bank loans, and

purchased fed funds to meet their needs.

Asset and Liability Management

Liquidity Risk

Liquidity risk is the potential that an institution will be unable to meet its obligations as

they come due. This is generally because the bank cannot liquidate assets or obtain

adequate funding (funding liquidity risk) or that it cannot easily unwind or offset large

exposures without significantly lowering market prices because of thinly traded securities

markets or market disruptions (market liquidity risk). While the following is not all

inclusive, it does present several criteria can serve as a guide to determine the level of

inherent liquidity risk in an institution: The composition, size, and availability of asset-

based liquidity sources in relation to the institution’s liquidity structure and liquidity

needs should be gauged. Factors to consider include the levels of money market assets

(Eurodollar placements, Govt funds, etc.); unpledged, marketable securities; and

securitization and asset sales activities. Thus, a bank that utilizes predominantly short-

term liabilities for funding will generally require more asset-based liquidity. Conversely,

a bank utilizing predominantly long-term liabilities, such as core deposits, for funding

generally will require lower asset-based liquidity. The nature, volatility, and maturity

structure of funding liabilities given the institution’s core business (for example, whether

it is predominantly a wholesale bank) must be considered. Factors to review include

level of dependence on credit sensitive funding sources, the relationship of wholesale

versus retail funding sources, and large funding concentrations, both by type of

instrument and by funding source. Bank management must make sure that the liability

structure makes sense given the nature of the assets generated by the core business.

Community banks are predominantly retail banks characterized by long-term asset

Asset and Liability Management
structures supported by a stable and long-term liability structure. Conversely, a wholesale

bank is characterized by a short-term asset structure supported by a short-term liability

structure. This arrangement is considered adequate, since the asset and liability roll-off

are closely matched. Funding diversification is extremely important in determining the

level of inherent liquidity risk in an institution. Factors to assess include:

 . The proportion of funding from various types of relationships, such as brokers,

professional money managers, out of market sources, and foreign.

 Sources of funds providers, for possible over-reliance on specific types of funds

providers, funding instruments, and maturities.

 The portion of funding sources with common exposures. Bankers should look at their

funds providers to ensure that they do not have common exposures.

Many bankers have learned the hard way over the years that their funds providers were

not as diversified as they thought. It is entirely possible to utilize funds providers located

all over the country that have a common exposure in such areas as sub prime lending or

real estate. Deterioration in these areas of concentration can result in an unexpected

drying up of funding from traditional providers, which can cause large-scale funding

problems. Funding gap assessment is very important, especially the institution’s short-

term exposures. Factors to assess include projected funding needs, assessment of bank’s

ability to cover any potential funding gaps at reasonable pricing, and trends in asset

quality. All funding analysis techniques assume that assets pay when due. Banks

experiencing asset quality problems must revise their funding analysis to embody a more

Asset and Liability Management
realistic set of assumptions about asset roll- off. The composition of the off-balance sheet

portfolio and its probable impact on funding must be evaluated. Factors that must be

assessed include off-balance sheet liability levels, composition of the off-balance sheet

liabilities, and the off-balance sheet monitoring program. The institution’s funding

strategies should be evaluated to ensure that they remain valid.

Factors to consider include cash flows, secondary liquidity of the securities portfolio,

monitoring and metrics program, policies and procedures, an assessment of institutional

funding costs compared to its competitors, and an assessment of management’s ability to

effectively control liquidity risk

A factor that is increasingly important is the rating services’ view of the institution. The

two factors to assess are current ratings and rating agency perspective on the condition of

the institution and rating trends. A detailed assessment of the institution’s contingency

funding program should be made.

Factors to evaluate include the monitoring and metrics program, a viability assessment of

the contingency plan in light of the abilities of management, an assessment of policy and

strategic goals, and a review of the structure and responsibilities of the crisis management



Liquidity risk management techniques must continue to improve in response to the

increasing volatility of these funding sources. Managers who fail to develop an effective

strategy for maintaining adequate liquidity may find that, at best, their business plans are

adversely affected by funding difficulties, and at worst, their bank’s ongoing viability is

Asset and Liability Management
threatened. Recent volatility in the wholesale funding markets has highlighted both the

importance of sound liquidity risk management practices and the fact that financial

institutions can and have experienced liquidity problems even during good economic

times. As a result, bank management’s ability to adequately meet daily and emergency

liquidity needs while controlling liquidity risk through risk identification, monitoring, and

controls is receiving increasingly intense regulatory scrutiny. To meet the new demands

of liquidity risk management, banks have evolved new techniques.


 Funding pools

Many multinational banks are moving away from back up lines of credit as their principle

source of liquidity in a funding crisis. Disadvantages to lines of credit include

commitment fee costs, material adverse change clauses, and a potentially adverse

reaction by the funding markets should these backup lines be utilized.

While many banks still maintain these lines, they no longer rely on them as their principle

source of back up liquidity (merely to meet the rating agencies’ requirements). These

banks now rely principally on segregated pools of liquid assets, generally, marketable

securities, to provide a secondary source of liquidity. To be effective, these segregated

pools, sometimes known as liquidity warehouses, should contain readily marketable

securities. Two keys to making this approach work include are to fill them with

investment grade securities to preclude the possibility that they could not be readily sold

in adverse markets and to avoid the use of securities from thinly traded markets that

could preclude rapid liquidation without incurring a substantial discount.

Asset and Liability Management

 Funding strategies

Banks are revising their funding strategies to avoid funding concentrations. Most

banking experts agree that excessive funding concentrations severely reduce the bank’s

ability to survive a liquidity crisis. Many banks are taking advantage of the good

economic times to diversify their funding sources. While most banks have developed a

contingency funding plan, the vast majority require some level of enhancement, including

triggering guidelines, metrics development, better quantification of funding sources,

adequacy of projected funding sources, and development of common contingency

scenarios. Many banks do not have predefined triggers to automatically implement their

contingency plan, and management should develop critical warning signals that would be

used as a benchmark during periodic liquidity reviews. In some cases, banks increasingly

are stress testing their funding plans, using various interest rate shocks and adverse

economic and competitive scenarios to ascertain their impact on both the funding

portfolio and market access. At a minimum, the funding plans are generally tested with

an interest rate shock simulation incorporating a drop or gain of at least 200 basis points.

On the horizon, banks are seeking ways to link their liquidity risk models with their

market risk models. The goal is to stress test their portfolios, load the resulting data into

their liquidity models, and see what will happen to their funding positions.

 Communication

Asset and Liability Management
Some banks are working to improve the communication lines between the treasury

function and back-office operational areas. At present, the treasury area relies on informal

lines of communication to keep it updated on operational events that could affect funding.

As a result, the treasury area is frequently unaware of a disruptive event, such as a wire

transfer failure or the need to fund a large loan commitment draw down, until it is either

too late or very costly to cover the resulting funding shortfall. Bank management is

paying more attention to investor relations than ever before. This is because dependence

on wholesale funding sources has resulted in the growing importance of credit risk in the

placement decisions of funds providers. Funds providers are increasingly sensitive to

credit risk and will terminate a funding relationship at the slightest hint of developing

credit problems at an institution. This has forced institutions to increase their attention to

managing both funding relationships and rating agency relations.

 Reporting systems

Reporting systems are not as effective as they could be in determining the funding

implications of off-balance sheet commitments. Many banks perform a historical survey

and then develop a guideline for a level of funding to be held against off-balance sheet

commitments. Unfortunately, they seldom, it ever look at the guideline again. As the

bank’s strategic objectives change and new products are offered, the level of off-balance

sheet liabilities tends to grow while the level of funding does not, since the bank’s

reporting process is not measuring the true level of liabilities. This lack of review,

coupled with the informal lines of communication between treasury and the operating

areas of the bank, has frequently resulted in costly funding mistakes. Many banks have

Asset and Liability Management
realized this and are developing better off-balance sheet reporting systems. In addition,

many institutions have a tendency to ratchet down their report generation during good

economic times, either reducing the level of information contained in the report or

discontinuing some reports altogether. This practice appears acceptable as long as the

remaining reports provide management with adequate information to properly manage

risk. Banks should realize, however, that to manage liquidity risk during adverse

economic conditions, a greater information flow embodying greater detail would be

needed. Therefore, policies should be in place to ratchet up the reporting process during

periods of deteriorating conditions.

 ALCO (Asset and Liability Committee) Structure

A well-managed organization’s ability to identify, monitor, and control inherent liquidity

risks depends upon the maintenance of an active ALCO structure that has responsibility

for developing and maintaining appropriate risk management policies and procedures,

MIS reporting, limits, and oversight programs. While the size and organizational

structure of the ALCO varies between banks, there appears to be a trend developing to

streamline ALCO operations by eliminating various subcommittees and managing

liquidity risk through one central body. Proponents of this structure argue that the

principal benefit of a single committee is greater efficiency, since many of the individuals

serving on the subcommittees also serve on the central committee. One streamlined

committee sharply reduces costly duplication of time and effort while making the

decision process more efficient.

Asset and Liability Management
 Best Practices for Managing Liquidity Risk

Recent volatility in the wholesale funding markets has served to highlight the importance

of sound liquidity risk management practices and reinforce the lesson that those banks

with well- developed risk management functions are better positioned to respond to new

funding challenges. The banking industry has developed many innovative solutions in

response to these challenges, some of which are presented here. Because banks vary

widely in their funding needs, the composition of their funding, the competitive

environment in which they operate, and their appetite for risk, there is no one set of

universally applicable methods for managing liquidity risk. While there is little

commonality in their approach to liquidity risk management, well-managed banks utilize

a common six-step process to manage it.

 Strategic Direction

Bank management, generally through ALCO, must articulate the overall strategic

direction of the bank’s funding strategy by determining what mix of assets and liabilities

will be utilized to maintain liquidity. This strategy should address the inherent liquidity

risks, which are generated by the institution’s core businesses. For instance, if the bank

has major positions in global capital markets, then liquidity should be managed to lessen

the impact of sudden changes in global markets. Or if the bank funds commercial loans

with core deposits, then liquidity should be managed to reduce the impact of a decline in

asset quality or a runoff of core deposits. This strategy must be documented through a

comprehensive set of policies and procedures and communicated throughout the bank.

Asset and Liability Management
 Integration

Liquidity management must be an integral part of asset/liability management. The bank’s

asset and liability management policy should clearly define the role of liquid assets along

with setting clear targets and limits. In the past, asset/liability management’s goal was

primarily to maximize revenue while liquidity management was managed separately.

This resulted in situations where asset and liability profiles structured for maximum

profitability had to be reconfigured (often at a loss) to meet sudden liquidity demands.

While the struggle between maximizing profitability and providing adequate liquidity

continues to this day, the best ALCO groups have realized that liquidity management

must be integral to avoid the steep costs associated with having to rapidly reconfigure the

asset/liability profile from maximum profitability to increased liquidity.

Some of the greatest changes in risk management have occurred in the integration area.

Instead of liquidity management being the responsibility of a small group of staff, it is

now integrated into the day-to-day decision-making process of core business line

managers. This is frequently done through the use of loan growth and balance sheet

targets that are “pushed down” to business line managers. Some banks achieve this goal

through the use of a transfer pricing system - giving “liquidity-generating business lines”

an internal earnings credit while charging “liquidity-using business lines cost centers for

funding. Another innovative method is to require business lines to structure deals as if

they had to fund them on a stand-alone basis.

 Measurement Systems

Asset and Liability Management
Most banking experts agree that maintaining an appropriate system of metrics is the

linchpin upon which the liquidity risk management framework rests. If they are to

successfully manage their liquidity position, management needs a set of metrics with

position limits and benchmarks to quickly ascertain the bank’s true liquidity position,

ascertain trends as they develop, and provide the basis for projecting possible funding

scenarios rapidly and accurately. In addition, the bank should establish appropriate

benchmarks and limits for each liquidity measure. The varied funding needs of

institutions preclude the use of one universal set of metrics. As a result, banks frequently

use a combination of stock and flow liquidity measures or have gone to exclusive reliance

on models. Stock measures look at the dollar levels of either assets or liabilities on the

balance sheet to determine whether or not these levels are adequate to meet projected

needs. Flow measures use cash inflows and outflows to determine a net cash position and

any resultant surplus or deficit levels of funding. Models are built utilizing hypothetical

scenarios to develop measures, benchmarks, and limits.

Balance-sheet-based measures are generally best suited to smaller institutions which fund

their business lines, generally loans, with core deposits. These banks generally develop

their measurement system and their corresponding benchmarks and limits based on either

selected peer group analysis or on studies of historical liquidity needs over time. In

addition, most of these banks utilize flow measures to determine their net cash position.

While this combination works well for smaller banks, regional and global institutions that

have significant trading operations and are heavily reliant on purchased funding find that

stock and flow measures are no longer adequate to meet their needs. As a result, these

Asset and Liability Management
banks have either developed or have purchased model-based measurement systems to

assist them in liquidity measurement. Two common models in use include:

Α . Cash Capital: Under this scenario, the model assumes that the bank is unable to

secure any outside funding. The model is designed to indicate how long the bank can

continue to meet its short-term funding obligations through asset sales. The model

calculates this by assessing the marketability of all bank assets and applying suitable

discounts to each. Once the discounted value of the assets is found, management will set

its benchmarks and limits. This model usually has a general limit, which is frequently

expressed in terms of a management set limit on the percentage of the discounted value

of the bank’s assets to total short-term funding. This general limit is then broken down

more finely with sub-limits set on different types of short-term funding.

Β . Liquidity Barometers: This model calculates the length of time an institution can

survive by liquidating its balance sheet using just two assumptions - that the bank

continues to operate under normal operating conditions or that the bank has suffered a

complete loss of access to the money market.

 Monitoring

Banks must be able to track and evaluate their current and anticipated liquidity position

and capacity. A monitoring system must be developed, consisting of guidelines, limits,

and trend development, that enables management to monitor and confirm that compliance

is within approved funding targets and, if not, to pinpoint the variances. The most

Asset and Liability Management
successful banks create objective targets for each liquidity measure, which often have

multi-level trigger points, to maximize their liquidity position. Because banks vary

widely in their funding needs, no one set of universally applicable liquidity measures or

targets can be applied to all institutions. A recent trend in liquidity monitoring is

incremental reporting, which monitors liquidity through a series of basic liquidity reports

during stable funding periods but ratchets up both the frequency and detail included in

reports produced during periods of liquidity stress. This type of reporting provides

flexibility to meet management’s increased information needs during stress periods

without the delay involved in developing new reports. The key to any incremental

reporting program’s success is making sure that the incremental reporting structure is

adequate to meet management’s projected information needs and reasonable in light of

such factors as the reliance on wholesale funding, off-balance sheet commitments, the

operating profile, management capability, and risk appetite. In addition, it is generally

considered a sound practice to periodically audit the monitoring process to confirm the

adequacy and accuracy of the system as well as compliance with approved funding level


 Balance Sheet Evaluation

Banks operate in a dynamic funding market. As a result, both the bank’s balance sheet

and market access trends should be periodically evaluated for emerging patterns that

could adversely affect liquidity, and the bank should develop strategies to manage these

trends. Bank funding requirements should be reviewed by an analysis of the behavior of

cash flows on both the asset and liability sides of the balance sheet, as well as off-balance

Asset and Liability Management
sheet items. Experience indicates that off-balance sheet funding requirements, such as

loan commitments, are not incorporated into these periodic cash flow analyses.Therefore,

a periodic statistical analysis of off-balance sheet items’ historical funding patterns

should be run to ensure that naturally occurring contingent liabilities will not exert

unexpected strains on the funding process at some point in the future. Part of any balance

sheet analysis is a review of future funding needs. As part of this assessment process, the

best banks have expanded the scope of their stress testing efforts from their contingency

planning to their funding profile. They run a number of scenarios to establish that they

will still be able to meet their funding needs at reasonable pricing levels in a variety of

economic conditions. The results of these stress tests should be reviewed by ALCO, and

any weaknesses found should result in changes in balance sheet strategies as well as

amendments to the bank’s funding policy. Because many banks are becoming more

reliant on credit-sensitive funding, it is vital that the bank be perceived by third-party

funding sources as being both profitable and managed in a safe and sound manner. Thus,

banks dependent on third-party funding should be continuously assessing

counterparty/investor name acceptance in the money markets for any hints of resistance

through a periodic monitoring program. While these monitoring programs vary, nearly all

monitor the following areas:

 Turn downs and non-renewals, especially among key counterparties, during

stressful market periods

 Decreased renewal rates for institution’s time deposit products (CDs, etc.).

 Unexpected declines in uninsured deposit balances.

 Rate spread trends monitored for adverse turns.

Asset and Liability Management

An equally important aspect of any monitoring program is communication, ensuring that

any weaknesses detected are promptly brought to management’s attention. All too often,

there are large time lapses between when market weaknesses have been detected and

when management is made aware of them. Finally, any balance sheet analysis should

address funding concentrations. Funding concentrations should be carefully assessed,

since the industry trend is away from concentrations. Many banking experts believe that

excessive funding concentrations can severely reduce a bank’s ability to survive a

liquidity crisis. Any excessive concentrations found should be addressed promptly.

 Contingency Liquidity Plan Preparation

Banks should have a formal contingency plan of policies and procedures to use as a

blueprint in the event the bank is unable to fund some or all of its activities in a timely

manner and at a reasonable cost. Industry experts generally agree that these crises tend to

develop very rapidly. Their onset is no longer measured in days but rather hours. The

former funding manager at one of these unfortunate banks once told the author that the

only good news on the day the funding crisis broke was that they had secured all of the

funding necessary to meet their daily position in the morning, since no one would sell

them funds in the afternoon. A comprehensive contingency funding plan can provide a

useful framework for meeting both temporary and long-range liquidity disruptions. A

Asset and Liability Management
good plan should emphasize a reliable but flexible administrative structure, realistic

action plans, ongoing communications at all levels, and a set of metrics backed by

adequate management information systems. Periodic testing of contingency MIS

requirements ensures the availability of timely reports for rapid decision-making. The

development of a contingency funding plan is a complex undertaking. There are several

areas where the best practices in the industry should be incorporated.


There is some diversity within the industry on how to implement the contingency plan.

Some banking organizations have developed predefined triggers that automatically

implement the plan, while others rely on a set of critical warning signals that require

senior management to review the situation and decide whether to implement it. To assist

banks in developing their liquidity crisis warning signal criteria, the following list of the

most common early warning signs is offered:

 Traditional funds providers start to disappear.

 Individual deal sizes begin to decrease as funders become more conservative.

 There are difficulties accessing longer-term money (particularly over quarter-end

reporting dates).

 It becomes more difficult to manage rising funding costs in a stable market.

 Customers start to cash in CDs and other time deposit products prior to maturity.

 The bank begins to be closed out of some markets and is increasingly being

forced to rely on brokers.

Asset and Liability Management
 Counterparty resistance develops to bank off-balance sheet products.

Policy and strategy considerations. Funding policies and strategies should be in place to

deal with various issues in a consistent manner during a liquidity crisis. Some of these

issues include:

 Bank and affiliate funding and off-balance sheet product strategies.

 Identification of sensitive markets to avoid.

 Establishment of formal pricing policies.

 Payout of deposit products prior to maturity.

 Direct vs. broker/dealer funding methods.

 Management of secondary market trading/discount of bank and holding

company liability instruments.

 Crisis management team development.

The formation of a crisis management team is vital to the success of any contingency

funding plan. Experience has shown that a team of highly skilled staff members is

necessary to quickly assess the evolving situation, rapidly decide a course of action,

implement the actions, monitor the situation, and take corrective actions as necessary. It

is also imperative that senior management assumes an active role in this crisis

management team, starting with the careful evaluation of potential team members. Other

actions considered to be best practices in this area include:

 Designate by position those individuals who will be members of the crisis


Asset and Liability Management
 Specify both under what condition(s) a liquidity crisis exists and what the

threshold will be for this group/committee to be activated.

 Designate each member of the crisis management group’s crisis management

authorities and responsibilities, including their geographic area of operation (if


 Specify the corporate communication channels and how information will flow to

regulators, to customers, to the press, and to the public.

Administrative considerations. Management must ensure that it is properly managing the

risks associated with a liquidity crisis. Some of the risk management procedures

commonly found in contingency plans include:

 More frequent meetings of the ALCO committee to ensure that all funding

strategies are being executed in an orderly and timely manner, that the situation is

being closely monitored, and that senior management and the board of directors

are being adequately informed of the developing situation.

 Actively keeping the bank’s best customers informed of unfolding events.

 Handling media relations.

 Increasing frequency and scope of liquidity monitoring metrics.

Reporting considerations:

Contingency plans should have good liquidity metrics and MIS support to ensure that

management has accurate and timely information on which to base decisions. As

Asset and Liability Management
mentioned earlier, metrics distribution should be on an incremental reporting basis.

Under incremental reporting, guidelines are set that mandate the frequency of metrics

reporting. In general, the deeper the crisis, the more frequent the distribution of metrics.

At a minimum, contingency monitoring reporting should include the following reports:

 A large fund report.

 An asset & liability run-off report.

 A liquidity report with limits and benchmarks.

 A flow analysis report (Gap, modified Gap, etc.).

 Balance sheet considerations.

The bank should have a good estimated flow of funds time line for the liquidation of

various portions of its balance sheet. It should be emphasized that these estimates should

be realistic and based on tangible research. Remember, one of a bank examiner’s favorite

questions is, “How do you know you can obtain that level of funding from this balance

sheet?” These estimates should be updated periodically, in light of changing market

conditions. This should be backed by evidence of the following:

 There should be a realistic analysis of cash inflows, cash outflows, and funds

availability at various time intervals (commonly 7, 10, 15, 30, 45, 60 and 90 days).

 Generally, well-written plans will specify a sequence for the timely liquidation of

various balance sheet items.

Asset and Liability Management
 Generally, it is considered a best practice to periodically test the back-up lines of

credit as part of the contingency plan. Having said that, there is a caution to observe.

Given the credit risk sensitivity of the money markets, many banks are reluctant to

test their lines for fear of inadvertently sending an adverse message to the inter-bank

markets. As a general rule of thumb, only banks with ample market access should

conduct wide-ranging testing on their back-up lines of credit.


 Off Balance Sheet Management Practices:

In many banks, the liquidity risk management systems have no provision for formally

incorporating the funding requirements of off- balance sheet commitments. Instead, a

network of informal communications serves to alert the funding desk of necessary

adjustments for imminent funding requirements. It is considered a best practice to

periodically supplement this informal working arrangement with a statistical analysis of

the historical funding patterns of various types of off-balance sheet items. Incorporating

the resulting funding requirements into calculations of future funding requirements

enhances the accuracy of funding projections, while assuring management that naturally

occurring contingent liabilities will not strain the funding process. A second best practice

is to establish formal lines of communication between the operational areas and the

treasury area to alert the funding area to any funding requirements caused by balance

sheet commitments.

 Funds Management

Asset and Liability Management
While many retail funded banks still rely on deposits and capital as their primary funding

source, most regional and multinational banks long ago outstripped these funding

sources, forcing them to rely heavily on purchased funds. Today, the industry is moving

away from exclusively managing the liability side of the balance sheet toward managing

both the asset and liability sides for maximum effectiveness. Banks are actively engaged

in managing assets through securitization of the loan book, loan sales, various asset

finance options (equities, governments, etc.), and liabilities through FHLB borrowings,

brokers notes, retail CDs, callable CDs, and subordinated debt. The selection and

maintenance of a diversified group of funding sources for both the liability and asset

sides of the balance sheet, as well as the establishment and maintenance of relationships

with liability holders, rating agencies, correspondents, and investors, is a complex and

ongoing process. Other factors that must be considered in funding source selection

include integration with the bank’s interest rate sensitivity, risk appetite, profit planning,

diversification, and capital management objectives. When reviewing a bank that is using

a diversified funds management approach, regulators generally ask themselves several


Α . How diversified are the funding sources?

There should be a wide diversity of sources including, but not limited to, private

banking, corporate, nonbank financial institutions, bank correspondent relationships,

brokered deposits, central bank, insurance companies, and government agencies.

Asset and Liability Management
Β . What types of funding instruments are offered by the bank?

A wide diversity of funding instruments, as practical, should be utilized, including

demand and time deposits, Fed funds, TT&L note option, CDs, bankers acceptances,

repurchase agreements, loan securitization, brokers note programs, loan sales

(participations), and private placements.

Does the bank have a history of funding diversification and funding instrument


The bank should display a pattern of constant innovation in developing new

funding sources and utilization of new funding instruments.

Ζ . What is the bank’s maturity pattern for funding instruments? Staggered maturity

patterns, floating rate borrowings, and rollovers should be utilized as much as possible.

 Funding Relationship Management:

As a bank becomes more reliant on third-party funding, many banking experts consider it

a best practice to have an on-going program of funds provider and rating agency

relations. It is vital that the bank be perceived by third parties as being profitable and well

run. Issues that need to be addressed in assessing the bank’s relationship management

efforts include:

Α . Does the bank have a proactive program in dealing with issues involving rating


There should be evidence of an active rating agency relations program. Rating agencies

revise debt ratings more quickly today than ever before, and banks need ongoing

Asset and Liability Management
relationships with the rating agencies so that they can make their views on any adverse

developments known. This ability to discuss situations informally with the rating

agencies has proven effective in maintaining favorable ratings.

Β . Does the bank have an active funds provider relations program?

Third-party funding providers, both domestic and foreign, are much more credit sensitive

to any sign of bank weakness than ever before. Active funds provider relations programs

have proven effective in forestalling “funder flight” caused by some temporary adverse

publicity. Unfortunately, these programs do not appear capable of preventing funder

flight in the event a more serious and lasting problem is uncovered.

Χ . Does the bank know which funding sources are the most credit sensitive?

The bank must know who its most sensitive funding sources are and structure its

relations program accordingly.


In the broadest sense liability management involves the planning and co-ordination of all

the bank’s sources of funds in order to maintain liquidity, profitability and safety to

maintain long-term growth. Effective liability management ensures that funds are

available over the short term to meet reserve requirements and to provide adequate

liquidity, and over the long term to satisfy loan demand and to provide investment

earnings. The basic concerns of liability management are how a bank can best influence

the volume, cost and stability of the various types of funds it can obtain.

Asset and Liability Management


When a bank needs funds to cover deposit withdrawals or ton expand its loans to acquire

other assets, it can obtain the needed funds in two ways. One way of acquiring funds is to

liquidate some of the short term assets that the bank holds in units liquidity account for

this purpose. A bank can also obtain funds by acquiring additional liabilities i.e. by

buying the funds it needs. Basically, liability management seeks to control the sources of

funds that a bank can obtain quickly and in large amounts, unlike demand and savings

deposits, which cannot be increased to any great degree over a short time period.

Depending on cost and availability, a bank will use a variety of liability management

instruments to obtain the liquidity needed for daily cash management, for loan expansion,

and for other earnings opportunities.

Liability management provides a bank with an alternative to asset liquidation to obtain

needed funds, and the bank chooses between these alternatives based on the relative costs

and risks involved. For example: depending on a bank’s size and on market conditions, a

bank in need of liquidity may chose to borrow government funds or issue CD’s rather

than sell T bills or other liquid assets. Liability management also provides a bank with an

alternative to asset management in obtaining the greatest value from inflows of funds.

Therefore a bank which follows both assets and liability management strategies has the

option of using cash inflows to obtain more short term liquid assets or to repay

outstanding liabilities, depending on which option provides the best combination of

earnings and safety.

Asset and Liability Management


 The key benefit of using Liability Management as a funding strategy is that it

provides a bank with an alternative to asset management for short term

adjustments of funds. For example: Assume that the bank experiences a sudden

and unexpected marked decline in the level of its demand deposits. If the bank’s

only source of liquidity is its assets, it must sell some of its securities to obtain the

funds needed to cover the run off of its deposits, whether or not market conditions

are favorable. With liability management, the bank may be able to raise the

needed funds by incurring liabilities, thereby postponing the sale of its assets until

conditions are more favorable.

 Liability management also provides a bank with the means of funding long term

growth. It does so by enabling a bank to expand its loans ad other assets by

managing its liabilities so that a certain volume of its liabilities remains

outstanding at all times so that it can build up on its deposit levels and thereby

expand the level of its loans. This approach of funding is normally followed

within a context of a long term upswing in the economy in which the borrowers

seek more loans for business expansion and depositors place their funds in

negotiable time certificates to earn competitive rates. In such cases, bank

management must have a clear idea of the level of outstanding liabilities that it

can count on holding through tight money periods by offering competitive rates.

 Another benefit of liability management is that it allows banks to invest greater

percentage of its available funds in its securities that provide less liquidity but

Asset and Liability Management
offer higher earnings, this is possible because the bank’s liquidity account does

not have to bear the full burden of the bank’s liquidity needs. A bank that has the

option of obtaining liquidity through its liabilities has an opportunity to increase

profitability because it can reduce the amount of short term assets it holds for

liquidity purposes and place those funds into longer term securities that offer less

liquidity but offer higher earnings.


 Although the use of liability management along with asset management allows a

bank the least costly method of obtaining liquidity from a wider range of funding

options, but the added options that liability management provides also require

greater complexity in planning and executing funds management strategies. This

is so since banks can obtain money market deposits and liabilities only by paying

market rates and the behavior of financial markets cannot be predicted with

complete accuracy.

 Another risk involved is that of issuing long term fixed rate CD’s at the peak of

the business cycle. This results in more costly CD’s in the future with a fall in the

interest rates. In fact if short term assets are funded by long term liabilities and

rates subsequently decline, a bank may find that it is paying more for funds than it

can earn on those funds.

 Another risks that relates to the changing market conditions is the stability of the

bank’s sources of borrowed or purchased funds. While large money center banks

are usually able to obtain funds under tight money conditions if they are willing to

Asset and Liability Management
pay market rates, smaller banks may find it impossible to compete for funds when

prices are high. The risk that a funding house may prove unreliable is also a real

problem for smaller banks that move outside their trading areas or that undertake

funding by means of liability instruments with which they are not completely

familiar. Such banks face the very real possibility that their sources of funds may

disappear just when they are most needed.

The basic benefits of liability management lie in the options it provides a bank in

obtaining a least costly method of funding given the bank’s particular needs and the

existing conditions of the financial markets. The risk involved in liability

management basically results from too much reliance on the use of purchased funds

without recognizing the impact that changing market conditions or other

unanticipated changes can have on the bank’s ability to secure funds when the money

is scarce.


The term structure of interest rates, also known as the yield curve, is a very common

bond valuation method. Constructed by graphing the yield to maturities and the

respective maturity dates of benchmark fixed-income securities, the yield curve is a

measure of the market's expectations of future interest rates given the current market

conditions. Treasuries, issued by the federal government, are considered risk-free, and as

such, their yields are often used as the benchmarks for fixed-income securities with the

same maturities. The term structure of interest rates is graphed as though each coupon

payment of a non-callable fixed-income security were a zero-coupon bond that “matures”

Asset and Liability Management
on the coupon payment date. The exact shape of the curve can be different at any point in

time. So if the normal yield curve changes shape, it tells investors that they may need to

change their outlook on the economy.

There are three main patterns created by the term structure of interest rates:

 Normal Yield Curve:

As its name indicates, this is the yield curve shape that forms during normal market

conditions, wherein investors generally believe that there will be no significant changes

in the economy, such as in inflation rates, and that the economy will continue to grow at a

normal rate. During such conditions, investors expect higher yields for fixed income

instruments with long-term maturities that occur further into the future.

In other words, the market expects long-term fixed income securities to offer higher

yields than short-term fixed income securities. This is a normal expectation of the market

because short-term instruments generally hold less risk than long-term instruments: the

further into the future the bond's maturity, the more time and therefore uncertainty the

bondholder faces before being paid back the principal. To invest in one instrument for a

Asset and Liability Management
longer period of time, an investor needs to be compensated for undertaking the additional


 Flat Yield Curve:

These curves indicate that the market environment is sending mixed signals to

investors, who are interpreting interest rate movements in various ways. During such

an environment, it is difficult for the market to determine whether interest rates will

move significantly in either direction further into the future.

A flat yield curve usually occurs when the market is making a transition that emits

different but simultaneous indications of what interest rates will do: there may be some

signals that short-term interest rates will rise and other signals that long-term interest

rates will fall. This condition will create a curve that is flatter than its normal positive

slope. When the yield curve is flat, investors can maximize their risk/return tradeoff by

Asset and Liability Management
choosing fixed-income securities with the least risk, or highest credit quality. In the rare

instances wherein long-term interest rates decline, a flat curve can sometimes lead to an

inverted curve.

 Inverted Yield Curve:

These yield curves are rare, and they form during extraordinary market conditions

wherein the expectations of investors are completely the inverse of those demonstrated by

the normal yield curve. In such abnormal market environments, bonds with maturity

dates further into the future are expected to offer lower yields than bonds with shorter


The inverted yield curve indicates that the market currently expects interest

rates to decline as time moves further into the future, which in turn means the

market expects yields of long-term bonds to decline. (Remember that as

interest rates decrease, bond prices increase and yields decline.)

Asset and Liability Management
 The Theoretical Spot Rate Curve

Unfortunately, the basic yield curve does not account for securities that have

varying coupon rates. When the yield to maturity was calculated, we assumed that

the coupons were reinvested at an interest rate equal to the coupon rate--therefore,

the bond was priced at par as though prevailing interest rates were equal to the

bond's coupon rate.

The spot-rate curve addresses this assumption and accounts for the fact that many

Treasuries offer varying coupons and would therefore not accurately represent similar

non-callable fixed-income securities. If for instance you compared a 10-year bond

paying a 7% coupon with a 10-year Treasury bond that currently has a coupon of 4%,

your comparison wouldn't mean much. Both of the bonds have the same term to

maturity, but the 4% coupon of the Treasury bond would not be an appropriate

benchmark for the bond paying 7%. The spot-rate curve, however, offers a more

accurate measure as it adjusts the yield curve so it reflects any variations in the interest

rate of the plotted benchmark. The interest rate taken from the plot is known as the

spot rate.

The spot-rate curve is created by plotting the yields of zero-coupon Treasury bills and

their corresponding maturities. The spot rate given by each zero-coupon security and

the spot-rate curve are used together for determining the value of each zero-coupon

component of a non-callable fixed-income security. (Remember the term structure of

interest rates is graphed as though each coupon payment of a non-callable fixed-

income security were a zero-coupon bond.)

Asset and Liability Management
 Since T-bills issued by the government do not have maturities greater than

one year, the bootstrapping method is used to fill in interest rates for zero-coupon

securities greater than one year. Bootstrapping is a complicated and involved

process and will not be detailed in this section (to your relief!); however, it is

important to remember that the bootstrapping method equates a T-bill's value to

the value of all zero-coupon components that form the securit

 The Credit Spread

The credit or quality spread is the additional yield an investor receives for

acquiring a corporate bond instead of a similar federal instrument. As illustrated

in the graph below, the spread is demonstrated as the yield curve of the corporate

bond is plotted with the term structure of interest rates. Remember that the term

structure of interest rates is a gauge of the direction of interest rates and the

general state of the economy. Since corporate fixed-income securities have more

risk of default than federal securities, the prices of corporate securities are usually

lower, and as such corporate bonds usually have a higher yield.

Asset and Liability Management
When inflation rates are increasing (or the economy is contracting) the credit spread

between corporate and Treasury securities widens. This is because investors must be

offered additional compensation (in the form of a higher coupon rate) for acquiring the

higher risk associated with corporate bonds.

When interest rates are declining (or the economy is expanding), the credit spread

between Federal and corporate fixed-income securities generally narrows. The lower

interest rates give companies an opportunity to borrow money at lower rates, which

allows them to expand their operations and also their cash flows. When interest rates

are declining, the economy is expanding in the long run, so the risk associated with

investing in a long-term corporate bond is also generally lower.

Now you have a general understanding of the concepts and uses of the yield curve.

The yield curve is graphed using government securities, which are used as benchmarks

for fixed income investments. The yield curve in conjunction with the credit spread is

used for pricing corporate bonds. Now that you have a better understanding of the

relationship between interest rates, bond prices, and yields, we are ready to examine

the degree to which bond prices change with respect to a change in interest rates.


The general definition of yield is the return an investor will receive by holding a bond

to maturity. So if you want to know what your bond investment will earn, you should

know how to calculate yield. Required yield, on the other hand, is the yield or return a

bond must offer in order for it to be worthwhile for the investor. The required yield of

a bond is usually the yield offered by other plain vanilla bonds that are currently

offered in the market and have similar credit quality and maturity.

Asset and Liability Management

A simple yield calculation that is often used to calculate the yield on both bonds

and the dividend yield for stocks is the current yield. The current yield calculates

the percentage return that the annual coupon payment provides the investor. In

other words, this yield calculates what percentage the actual dollar coupon

payment is of the price the investor pays for the bond. (Note that the multiplication

by 100 in the formulas below converts the decimal into a percentage, allowing us

to see the percentage return):

So, if you purchased a bond with a par value of $100 for $95.92 and it paid a coupon

rate of 5%, this is how you'd calculate its current yield:

Notice how this calculation does not include any capital gains or losses the investor

would make if the bond were bought at a discount or premium. Because the bond price

compared to its par value is a factor that affects the actual current yield, the above

formula would give a slightly inaccurate answer--unless of course the investor pays

par value for the bond. To correct this, investors can modify the current yield formula

by adding the result of the current yield to the gain or loss the price gives the investor:

[(Par Value – Bond Price)/Years to Maturity]. The modified current yield formula then

takes into account the discount or premium at which the investor paid for the bond.

This is the full calculation:

Asset and Liability Management

Let's re-calculate the yield of the bond in our first example, which matures in 30

months and has a coupon payment of $5:

The adjusted current yield of 6.84% is higher than the current yield of 5.21% because

the bond's discounted price ($95.92 instead of $100) gives the investor more of a gain

on the investment.

One thing to note, however, is whether you buy the bond between coupon payments. If

you do, remember to use the dirty price in place of the market price in the above

equation. The dirty price is what you will actually pay for the bond, but usually the

figure quoted in U.S. markets is the clean price. (We explain the difference between

clean and dirty price in the section of this tutorial on bond pricing.)

Now we must also account for other factors such as the coupon payment for a zero-

coupon bond, which has only one coupon payment. For such a bond, the yield

calculation would be as follows:

n = years left until maturity

Asset and Liability Management
If we were considering a zero-coupon bond that has a future value of $1000, that

matures in two years, and can be currently purchased for $925, this is how we would

calculate its current yield:

 Calculating Yield to Maturity

The current yield calculation we learnt above shows us the return the annual coupon

payment gives the investor, but this percentage does not take into account the time

value of money, or, more specifically, the present value of the coupon payments the

investor will receive in the future. For this reason, when investors and analysts refer to

yield, they are most often referring to the yield to maturity (YTM), which is the interest

rate by which the present values of all the future cash flows are equal to the bond's


An easy way to think of YTM is to consider it the resulting interest rate the investor

receives if he or she invested all of his or her cash flows (coupons payments) at a

constant interest rate until the bond matures. YTM is the return the investor will

receive from his or her entire investment. It is the return you get by receiving the

present values of the coupon payments, the par value, and capital gains in relation to

the price you pay.

The yield to maturity, however, is an interest rate that must be calculated through trial

and error. (To find YTM we are essentially solving for “i” in the bond pricing formula

Asset and Liability Management
we saw in the section on bond pricing.) But such a method of valuation is complicated

and can be time consuming, so investors (whether professional or private) will

typically use a financial calculator or program that is quickly able to run through the

process of trial and error. But, if you don't have such a program, you can use an

approximation method that does not require any serious mathematics.

To demonstrate this method, we first need to review the relationship between a bond's

price and its yield. In general, as a bond's price increases, yield decreases. This

relationship is measured using the price value of a basis point (PVBP). By taking into

account factors such as the bond's coupon rate and credit rating, the PVBP measures

the degree to which a bond's price will change when there is a 0.01% change in interest

The charted relationship between bond price and required yield appears as a negative

This is due to the fact that a bond's price will be higher when it pays a coupon that is

higher than prevailing interest rates. As market interest rates increase, bond prices


Asset and Liability Management
The second concept we need to review is the basic price-yield properties of bonds:

Premium bond: Coupon rate is greater than market interest rates.

Discount bond: Coupon rate is less than market interest rates.

Thirdly, remember to think of YTM as the yield a bondholder receives if he or she

reinvested all coupons received at a constant interest rate (which is the interest rate that

we are solving for). If we were to add the present values of all future cash flows, we

would end up with the market value or purchase price of the bond.

The calculation can be presented as:


Let's run through an example:

You hold a bond whose par value is $100 but has a current yield of 5.21% because the

bond is priced at $95.92. The bond matures in 30 months and pays a semi-annual

coupon of 5%.

Asset and Liability Management
1. Determine the cash flows: Every six months you would receive a

coupon payment of $2.50 (0.025*100). In total, you would receive five

payments of $2.50, plus the future value of $100.

2. Plug the known amounts into the YTM formula:

Remember that we are trying to find the semi-annual interest rate as the

bond pays the coupon semi-annually.

3.Guess and Check:

Now for the tough part: solving for “i,” or the interest rate. Rather than

pick random numbers, we can start by considering the relationship

between bond price and yield. When a bond is priced at par, the interest

rate is equal to the coupon rate. If the bond is priced above par (at a

premium), the coupon rate is greater than the interest rate. In our case, the

bond is priced at a discount from par, so the annual interest rate we are

seeking (like the current yield) must be greater than the coupon rate of 5%.

Now that we know this, we can calculate a number of bond prices by

plugging various annual interest rates that are higher than 5% into the

above formula. Here is a table of the bond prices that result from a few

different interest rates:

Asset and Liability Management

Because our bond price is $95.52, our list shows that the interest rate we

are solving for is between 6% (which gives a price of $95) and 7% (which

gives a price of $98). Now that we have found a range between which the

interest rate lies, we can make another table showing the prices that result

from a series of interest rates that go up in increments of 0.1% instead of

1.0%. Below we see the bond prices that result from various interest rates

that are between 6.0% and 7.0%:

We see then that the present value of our bond (the price) is equal to

$95.92 when we have an interest rate of 6.8%. If at this point we did not

find that 6.8% gives us the exact price we are paying for the bond, we

would have to make another table that shows the interest rates in 0.01%

increments. (You can see why investors prefer to use special programs to

narrow down the interest rates—the calculations required to find YTM can

be quite numerous!)

Asset and Liability Management
 Calculating Yield for Callable and Puttable Bonds

Bonds with callable or puttable redemptions features have additional yield

calculations. A callable bond's valuations must account for the issuer's ability to call

the bond on the call date, and the puttable bond's valuation must include the buyer's

ability to sell the bond at the pre-specified put date. The yield for callable bonds is

referred to as yield-to-call, and the yield for puttable bonds is referred to as yield-to-put.

Yield to call (YTC) is the interest rate that investors would receive if they held the

bond until the call date. The period until the first call is referred to as the call protection

period. Yield to call is the rate that would make the bond's present value equal to the

full price of the bond. Essentially, its calculation requires two simple modifications to

the yield-to-maturity formula:

Note that European callable bonds can have multiple call dates, and a yield to call can

be calculated for each.

Yield to put (YTP) is the interest rate that investors would receive if they

held the bond until its put date. To calculate yield to put, the same

modified equation for yield to call is used except the bond put price

replaces the bond call value, and the time until put date replaces the

time until call date.

Asset and Liability Management
For both callable and puttable bonds, astute investors will compute both yield and all

yield-to-call/yield-to-put figures for a particular bond, and then use these figures to

estimate the expected yield. The lowest yield calculated is known as yield to worst,

which is commonly used by conservative investors when calculating their expected

yield. Unfortunately, these yield figures do not account for bonds that are not

redeemed or are sold prior to the call or put date.

Now you know that the yield you receive from holding a bond will differ

from its coupon rate because of fluctuations in bond price and from the

reinvestment of coupon payments. In addition, you are now able to

differentiate between current yield and yield to maturity. In our next

section we will take a closer look at yield to maturity, and how the YTMs

for bonds are graphed to form the term structure of interest rates, or yield



By convention, the term "money market" refers to the market for short-term

requirement and deployment of funds. Money market instruments are those

instruments, which have a maturity period of less than one year. The most active part

of the money market is the market for overnight and term money between banks and

institutions (called call money) and the market for repo transactions. The former is in

the form of loans and the latter are sale and buy back agreements – both are obviously

not traded. The main traded instruments are commercial papers (CPs), certificates of

deposit (CDs) and treasury bills (T-Bills). All of these are discounted instruments ie

they are issued at a discount to their maturity value and the difference between the

Asset and Liability Management
issuing price and the maturity/face value is the implicit interest. These are also

completely unsecured instruments. One of the important features of money market

instruments is their high liquidity and tradability. A key reason for this is that these

instruments are transferred by endorsement and delivery and there is no stamp duty or

any other transfer fee levied when the instrument changes hands. Another important

feature is that there is no tax deducted at source from the interest component. A brief

description of these instruments is as follows:

 Commercial paper (CP):

These are issued by corporate entities in denominations of Rs2.5mn and usually have a

maturity of 90 days. CPs can also be issued for maturity periods of 180 and one year

but the most active market is for 90 day CPs.

Two key regulations govern the issuance of CPs-firstly, CPs have to be compulsorily

rated by a recognized credit rating agency and only those companies can issue CPs

which have a short term rating of at least P1. Secondly, funds raised through CPs do

not represent fresh borrowings for the corporate issuer but merely substitute a part of

the banking limits available to it. Hence, a company issues CPs almost always to save

on interest costs ie it will issue CPs only when the environment is such that CP

issuance will be at rates lower than the rate at which it borrows money from its

banking consortium.

Asset and Liability Management
 Certificates of deposit (CD):

These are issued by banks in denominations of Rs0.5mn and have maturity ranging

from 30 days to 3 years. Banks are allowed to issue CDs with a maturity of less than

one year while financial institutions are allowed to issue CDs with a maturity of at

least one year. Usually, this means 366 day CDs. The market is most active for the one

year maturity bracket, while longer dated securities are not much in demand. One of

the main reasons for an active market in CDs is that their issuance does not attract

reserve requirements since they are obligations issued by a bank.

 Treasury Bills (T-Bills):

These are issued by the Reserve Bank of India on behalf of the Government of India

and are thus actually a class of Government Securities. At present, T-Bills are issued

in maturity of 14 days, 91 days and 364 days. The RBI has announced its intention to

start issuing 182 day T-Bills shortly. The minimum denomination can be as low as

Rs100, but in practice most of the bids are large bids from institutional investors who

are allotted T-Bills in dematerialized form. RBI holds auctions for 14 and 364 day T-

Bills on a fortnightly basis and for 91 day T-Bills on a weekly basis. There is a

notified value of bills available for the auction of 91 day T-Bills which is announced 2

days prior to the auction. There is no specified amount for the auction of 14 and 364

day T-Bills. The result is that at any given point of time, it is possible to buy T-Bills to

tailor one’s investment requirements.

Asset and Liability Management
Potential investors have to put in competitive bids at the specified times. These bids

are on a price/interest rate basis. The auction is conducted on a French auction basis ie

all bidders above the cut off at the interest rate/price which they bid while the bidders

at the clearing/cut off price/rate get pro rata allotment at the cut off price/rate. The cut

off is determined by the RBI depending on the amount being auctioned, the bidding

pattern etc. By and large, the cut off is market determined although sometimes the RBI

utilizes its discretion and decides on a cut off level which results in a partially

successful auction with the balance amount devolving on it. This is done by the RBI to

check undue volatility in the interest rates.

Non-competitive bids are also allowed in auctions (only from specified entities like

State Governments and their undertakings and statutory bodies) wherein the bidder is

allotted T-Bills at the cut off price.

Apart from the above money market instruments, certain other short-term instruments

are also in vogue with investors. These include short-term corporate debentures, Bills

of exchange and promissory notes.

Like CPs, short-term debentures are issued by corporate entities. However, unlike CPs,

they represent additional funding for the corporate ie the funds borrowed by issuing

short term debentures are over and above the funds available to the corporate from its

consortium bankers. Normally, debenture issuance attracts stamp duty; but issuers get

around this by issuing only a letter of allotment (LOA) with the promise of issuing a

formal debenture later – however the debenture is never issued and the LOA itself is

redeemed on maturity. These LOAs are freely tradable but transfers attract stamp duty.

 Bills of exchange

Asset and Liability Management
These are promissory notes issued for commercial transactions involving exchange of

goods and services. These bills form a part of a company’s banking limits and are

discounted by the banks. Banks in turn rediscount bills with each other.


The primary market also called the new issue market, is that in which newly

issued securities are bought by investors from their issuers. The securities may be

bought with or without the service of the dealers or underwriters. Dealers act as

middlemen in these transactions, notes their first permanent owners.

The secondary market also called as the after market is that in which any later

sales of securities from one owner to another are transacted. while some portion

of the bank’s assets are held to maturity, banks often use the secondary markets to

sell investments before maturity for several reasons which are as follows.

 To build up legal reserves when loan demand increases

Bank loans and investments move in the opposite directions in a cyclical pattern.

When business activity is slow and loan demand is down, banks invest more

heavily in securities. When business activity picks up and loan demand rises,

Asset and Liability Management
banks sell their investments to meet their customer needs. Thus one of the major

reasons banks own secondary reserves are to supply the reserves needed to

support the granting of credit.

 To rearrange assets in time of rising and falling yields

When yields are expected to rise, banks can sell their longer maturities to avoid

price declines. When yields are expected to fall, banks sell their short term

securities and buy long term investments, whose prices will increase more

rapidly. Sales also may be prompted by the tax advantages of gains or losses.

 To achieve a balance between risk, yield and maturity

Banks sell some securities to take more risk and improve average yield. Banks are

often concerned with achieving an effective balance between characteristics of

loans and investments. A bank adding to the average risk in its loans balance this

added risk by increasing the average credit quality of its credit holdings. In like

manner, if the bank holds loans of above average quality, it can accept greater risk

in its securities holdings.


Underwriting in primary markets by banks and dealers involves several areas of

service to borrowers

 Evaluating financing applications and shaping them into financial

assets that will appeal to the investors

Asset and Liability Management
Underwriters know the current needs of the investors and counsel issuers on those

needs, the level of risks acceptable to th investors, the protective covenants

expected by the investors and the rate of interest required to sell an issue. Bank

loan officers fulfill this function when they evaluate applications for business

loans, mortgage loans, and consumer credit. Loan officers accept or reject

applications by evaluating each proposals against bank standards. They also

negotiate changes in the terms of the proposals to meet bank standards and to

meet the borrower’s needs and ability to repay the debt when due.

 Arranging for the distribution and sale of new issues of securities

Investment banks and dealers assist the issuer in creating securities that offer

investors an attractive rate of return, liquidity and quality. In shaping the security,

the investment bankers also assist the issuer in registering the security with SEBI.

 Purchasing the securities directly from the issuers and adding them to

their inventories of securities for sale

Underwriters buy the entire issues of securities from the issuer, pay for them in

full and thus provide the issuer with funds for immediate use. Because

underwriters have an expert grasp of current market conditions and investor

preferences, they incur few loses. They fill an important role in the primary

market by channeling new securities from issuers to first owners at current market

prices and yields.

Asset and Liability Management

A bank needing funds to respond to deposit withdrawals or loan demand an obtain

them by purchasing liabilities or by holding assets that will mature or will be sold

to provide needed liquidity. Here the main concern is asset management for

liquidity i.e drawing liquidity from short term assets that the bank holds in its

liquidity account just for this purpose.

Liquid assets are those that can be sold or that which will mature as funds needs

arise. A bank’s liquid assets are expected to return same interest earnings, but

their main purpose is to provide liquidity. The liquidity account and the

investment account together are referred to as the bank’s investment portfolio.

Distinction between the two accounts are based on their basic purposes and on the

maturities of the assets held in them. The liquidity account is meant to be used by

reducing and increasing the account holdings as needs arise. Maturities in the

liquidity account are limited to two years although same banks limit maximum

maturities to one year.


The interest earned on the investment portfolio is often the second-largest revenue

source for banks. In addition to being an important revenue source, the investment

portfolio serves as a secondary reserve to help banks meet liquidity needs. Further, it is

used to meet pledging requirements against governmental deposits. Investments also

provide banks with a useful way to diversify their asset base.

Asset and Liability Management
The investment portfolio is a key revenue source and liquidity management tool for

banks. When loan demand is low, banks invest excess funds in securities to earn a

return until demand improves. When that occurs, banks sell the securities they

purchased to make loans. Because the investment portfolio plays a critical role in a

bank’s success, its management at most banks is governed by policy. The foundation

for sound management and administration of the investment portfolio is the investment

policy. This policy represents the board of director’s guidance and direction to

management regarding the bank’s investments. With boundaries set by policy,

management devises the investment strategies to meet the bank’s needs.

Depending upon the bank, the investment policy may be part of the asset and liability

management policy or integrated into other polices the bank feels appropriate. It is

important to note that bank policies are often integrated with one another to ensure

consistent risk management throughout the bank’s operations. For example, it

wouldn’t be unusual for the loan policy to do any one of the following (each of these

policy items reflect the terms on which loans are available to the bank’s customers,

while also addressing the bank’s market risk exposure):

• Specify a maximum term for which loans are made.

• State the type of rate (variable or fixed) that will be offered on credit extended.

• Require a prepayment penalty if a borrower repays a loan early.


This lesson focuses on basic matters in an investment policy and the risk management

role it plays. After you complete this lesson, you should be able to:

Asset and Liability Management
• List the purpose of the investment policy.

• Recount matters often addressed in an investment policy.


Like all other policies of the bank, the investment policy is tailored to the special

needs and conditions faced by the bank. Although its primary focus is guiding

investment activities, it takes into account the multiple needs of the bank, providing

for such matters as asset diversification, earnings and liquidity.

At a minimum, a complete investment policy often includes:

 A statement of objectives. For example, provide earnings, liquidity, meet pledging


 A listing of investments permitted and not permitted for the bank.

 Diversification guidelines and concentration limits to avoid committing too much

of the bank’s capital to a single issuer, industry group or geographical area.

 Proper reporting of securities activities, making sure investments are

appropriately categorized according to generally accepted accounting principles.

 Maturity and repricing guidelines, setting out the maturity distribution of the

bank’s investments, establishing interest rate terms (fixed or adjustable rate) and

their appropriate use and setting out circumstances for selling specific maturities.

 Limitations on quality ratings and the agency issuing the rating. The rating grade

will determine which investments the bank can buy.

Asset and Liability Management
 Valuation procedure and frequency—the method used to value securities and the

frequency in which it must be done (monthly, quarterly, etc.). At a minimum, it

most likely will be quarterly to meet financial reporting requirements to bank


 Officer’s authority and approval process—who has what authority to conduct

business for the bank and what prior approvals they must have to exercise that


 Procedures covering policy exceptions—the process for handling exceptions and

who approves policy exceptions. Most often it is the board that approves policy


 New product review – setting out when a review must be done, of what it must

consist and documentation required to show the review was done.

 Selection of securities dealers—listing of broker/dealers with whom the bank will

do business, scrutinized for their reputation and financial standing.

 Reporting requirements—reports and the frequency of those reports to the board

on the bank’s security positions including information on such things as issues

held, amount of each issue held, purchase price and current market price.

 Periodic review—when the board should review the investment policy for its

consistency with the board current tolerance for risk and evolving market

conditions. Also, provides for the periodic independent review of the investment

function for adherence to policy.

Asset and Liability Management
The principal control tools for managing market risk are a bank’s policies.


The investment policy is the primary policy tool for controlling the bank’s market risk

in its securities portfolio. Like other bank policies, it sets out the basic objectives to be

accomplished by the policy. These objectives might be to minimize risk, provide a

good return, provide ample liquidity and meet pledging requirements. It also covers

basic matters relating to the bank’s investment securities, such as:

Who is responsible for the various aspects of the securities portfolio?

 For example, the board is ultimately responsible for establishing, reviewing

and evaluating the investment policy. Management has responsibility for

establishing policies, procedures and control systems to implement the board’s

policy guidance related to the bank’s investments and for implementing

systems to monitor policy adherence.

What …

 Are acceptable and unacceptable investments?

Asset and Liability Management
 Are unacceptable investment practices?

 Are the limits on securities holdings from a single issuer?

 Due diligence should be performed before making investments? (That is, what

types of investments require analysis before purchase, what analysis is

required, and what documentation is required?)

 Due diligence should be performed on a broker-dealer with whom the bank

does business (reputation, financial condition, etc.)?

 Reports should be produced on the bank’s securities portfolio and its content?

 Independent review should be undertaken of the adequacy of the bank’s

policies, procedures and control systems that govern the bank’s investment



 Are investment transactions to be reviewed by the board?

 Are the fair value of securities to be determined? (Probably at least quarterly to

meet Call Report reporting requirements.)

 Should due diligence be done on the bank’s broker/dealers?

 Should the board review the investment policy to determine if it reflects the

board’s current thinking about appropriate securities investments?

Asset and Liability Management
Many banks also have broader interest rate risk policies that address the measurement,

management and control of market risk inherent in the entire balance sheet. In addition

to objectives and authorities, the interest rate risk policy typically addresses:

 The type of risk measurement methodology to use (for instance, the Earnings At

Risk (EAR) simulation, the Economic Value of Equity (EVE) simulation, Gap


 Risk measurement metrics and explicit market risk limits.

 Exception procedures and remedies.

 Permissible hedging strategies and the use of derivatives.

 Directives regarding broker-dealers.

 Other aspects as needed.

Asset and Liability Management

 Bibliography

 http://www.stlouisfed.org/col/director/alco/boardresponse_investmentpoli


 www.iimahd.ernet.in\~jrvarma/papers/1jaf3-2.pdf

 www.indiainfoline.com

 www.investopedia.com

Reference Books

 Bank Investments and Fund Management - Gerald O.Halter

 Bank Financial Management – Indian Institute Of Banking and Finance