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    MBFI Risk Management

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    Urvi Aggarwal Sehra
    This document discusses liquidity risk management in banks. It describes the various types of risks banks face, including liquidity risk from demand deposits, fixed deposits, and unpredictable loan inflows. It then discusses tools for managing liquidity risk, such as cash reserves, liquid assets, interbank markets, repos, and RBI interventions. Liquidity management requires balancing liquidity needs with return. The call money market and government bonds are also summarized as key tools for short-term liquidity management.

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    MBFI Risk Management

    Uploaded by

    Urvi Aggarwal Sehra
    87 views13 pages
    This document discusses liquidity risk management in banks. It describes the various types of risks banks face, including liquidity risk from demand deposits, fixed deposits, and unpredictable loan inflows. It then discusses tools for managing liquidity risk, such as cash reserves, liquid assets, interbank markets, repos, and RBI interventions. Liquidity management requires balancing liquidity needs with return. The call money market and government bonds are also summarized as key tools for short-term liquidity management.

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    Risk management in banks

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    This document discusses liquidity risk management in banks. It describes the various types of risks banks face, including liquidity risk from demand deposits, fixed deposits, and unpredictable loan inflows. It then discusses tools for managing liquidity risk, such as cash reserves, liquid assets, interbank markets, repos, and RBI interventions. Liquidity management requires balancing liquidity needs with return. The call money market and government bonds are also summarized as key tools for short-term liquidity management.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    87 views13 pages

    MBFI Risk Management

    Uploaded by

    Urvi Aggarwal Sehra
    This document discusses liquidity risk management in banks. It describes the various types of risks banks face, including liquidity risk from demand deposits, fixed deposits, and unpredictable loan inflows. It then discusses tools for managing liquidity risk, such as cash reserves, liquid assets, interbank markets, repos, and RBI interventions. Liquidity management requires balancing liquidity needs with return. The call money market and government bonds are also summarized as key tools for short-term liquidity management.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 13

    MBFI

    Risk Management in Banks

    Risks on a Banks Balance Sheet


    Liquidity Risk
    Credit Risk
    Market Risk
    Operational Risk

    Liquidity Risk
    CASA
    Withdraw able on demand
    Core portion & volatile portion
    FDs - Pre-Mature withdrawal
    Loans inflow only on maturity
    Cash Credit inflow unpredictable
    Liquidity risk inherent
    on a commercialbanks balance sheet

    Issues in Liquidity Management


    Day-to-Day liquidity management
    Sufficient cash in the vaults to meet
    withdrawals (depositors and Cash Credit)
    Maintenance of CRR
    Investing day-to-day surplus
    Borrowing to cover day-to-day shortages
    Potential/ unforeseen liquidity crunch

    Managing liquidity risk


    Cash in vaults
    Liquid assets (SLR) -T Bills & GOI, SDL
    Call Money
    RBI Repos & Reverse Repos
    CBLO
    Repos with other Banks & FIs
    Liquidity management is a trade-off
    between need for liquidity and return

    Call Money Market


    Overnight funds / deposits
    Participants -Banks & Primary Dealers
    Demand And Supply :
    Temporary surpluses / deficits of
    banks and PDs

    Characteristics of Call Money Market

    Clean Lending (without any security backing)

    In the form of an overnightdeposit

    Interest rates - determined by the market forces

    Volatile : wide fluctuations even during the day

    Intervention of RBI through LAF, OMO

    Contracted over the telephone

    High Value transactions

    Brokers not allowed

    Treasury Bills

    Short Term Debt of Government of India -Maturity


    less than a year

    Issued
    through RBI
    at a discount to face-value and redeemed at F V
    for 91, 182 days and 364 days
    by auction

    Good secondary market

    Good instrument for cash management

    Government Debt

    Very Large requirements of GOI every year


    RBIs role : advise, issue management and
    registrar
    Forms : D-Mat : SGL Balances (maintained by
    RBI) & C-SGL (Constituent SGL) through
    intermediaries
    Coupons: semi-annual, zero, floating rate
    Indexed Bonds
    Issued thro auctions : normal or price auctions
    State Development Bonds Bonds issued by
    State Governments through RBI

    Repos and Reverse Repos

    Repurchase agreement / RPs Buy-Backs/ Ready Forward


    Combination of a Ready Transaction and a Forward Deal
    Simultaneous sale of an asset (today)
    And an agreement (contract)
    To repurchase the same asset on a future date at a price fixed
    today
    Two legs
    Sale
    Give the asset and receive rupees
    Title passes on day one
    Re-purchase
    Give rupees and receive back the asset
    Title restored on the date of maturity

    Repo a form of borrowing ?

    RBI and the Money Market

    RBI intervention and signaling through the money market

    RBI Reverse Repo sells GOI bonds from own holding and buys back
    Implications
    Borrows from the market
    Sucks up liquidity
    Influences interest rate s- floor

    RBI Repo
    Buys GOI bonds into own holding and sells them back
    Implications
    Lends to banks / PDs
    Injects liquidity
    Influences interest rates ceiling

    RBI

    LAF and OMO

    LAF (Liquidity Adjustment Facility)


    Every day one to 3 days Repo & Term repos
    Both REPO and Reverse Repo window
    Pre-announced interest rates (Monetary Policy)
    Very effective fine tuning of money supply /
    liquidity / interest rates
    Useful for banks in da-to-day liquidity management

    OMO sale or purchase of RBI on own account


    Influences the money supply / liquidity
    Longer-term effect that LAF

    C B L Os

    Collateralized Borrowing and Lending Obligations

    Separates the claims of a lender and the repayment


    obligations of the borrowers

    Effectively makes the Claims & Obligations liquid

    Mechanism to borrow and lend funds against


    securities for the desired period

    Platform for the lenders and borrowers to come


    together

    Not only for banks but also for primary dealers,


    financial institutions, mutual funds, non-banking
    finance companies and corporates.

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