mbfi risk management

7/23/2019 MBFI Risk Management

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MBFI

Risk Management in Banks


2/13

Risks on a Banks Balance Sheet

Liquidity Risk

Credit Risk

Market Risk

Operational Risk


3/13

Liquidity Risk

CASA

ithdra! a"le on demand

Core portion # $olatile portion

F%s & 're&Mature !ithdra!al

Loans ( in)lo! only on maturity

Cash Credit ( in)lo! unpredicta"le

Liquidity risk inherenton a commercialbanks balance sheet


4/13

Issues in Liquidity Management

%ay&to&%ay liquidity management

Su))icient cash in the $aults to meet

!ithdra!als *depositors and Cash Credit+ Maintenance o) CRR

In$esting day&to&day surplus

Borro!ing to co$er day&to&day shortages

'otential, un)oreseen liquidity crunch


5/13

Managing liquidity risk

Cash in $aults

Liquid assets *SLR+ &- Bills # .OI/ S%L

Call Money

RBI Repos # Re$erse Repos

CBLO

Repos !ith other Banks # FIs

Liquidity management is a trade-off

between need for liquidity and return


6/13

Call Money Market

O$ernight )unds , deposits

'articipants &Banks # 'rimary %ealers

%emand And Supply 0

-emporary surpluses , de)icits o)"anks and '%s


7/13

Characteristics o) Call Money Market

Clean Lending *!ithout any security "acking+

In the )orm o) an o$ernightdeposit

Interest rates & determined "y the market )orces 1olatile 0 !ide )luctuations e$en during the day

Inter$ention o) RBI through LAF/ OMO

Contracted o$er the telephone 2igh 1alue transactions

Brokers not allo!ed


8/13

-reasury Bills

Short -erm %e"t o) .o$ernment o) India &Maturityless than a year

Issued

through RBI at a discount to )ace&$alue and redeemed at F 1

)or 34/ 456 days and 789 days

"y auction .ood secondary market

.ood instrument )or cash management


9/13

.o$ernment %e"t

1ery Large requirements o) .OI e$ery year RBIs role 0 ad$ise/ issue management and

registrar

Forms 0 %&Mat 0 S.L Balances *maintained "yRBI+ # C&S.L *Constituent S.L+ throughintermediaries

Coupons0 semi&annual/ :ero/ )loating rate Inde;ed Bonds Issued thro auctions 0 normal or price auctions State %e$elopment Bonds ( Bonds issued "y

State .o$ernments through RBI


10/13

Repos and Re$erse Repos

Repurchase agreement , R's Buy&Backs, Ready For!ard

Com"ination o) a Ready -ransaction and a For!ard %eal Simultaneous sale o) an asset *today+

And an agreement *contract+

-o repurchase the same asset on a )uture date at a price )i;edtoday

-!o legs Sale

.i$e the asset and recei$e rupees

-itle passes on


11/13

RBI and the Money Market

RBI inter$ention and signaling through the money market

RBI Re$erse Repo&

sells .OI "onds )rom o!n holding and "uys "ack

Implications

Borro!s )rom the market

Sucks up liquidity

In)luences interest rate s& > )loor?

RBI Repo

Buys .OI "onds into o!n holding and sells them "ack Implications

Lends to "anks , '%s

In@ects liquidity

In)luences interest rates ( >ceiling?


12/13

RBI & LAF and OMO

LAF *Liquidity Ad@ustment Facility+

$ery day one to 7 days Repo # -erm repos

Both R'O and Re$erse Repo !indo!

're&announced interest rates *Monetary 'olicy+

1ery e))ecti$e )ine tuning o) money supply ,liquidity , interest rates

se)ul )or "anks in da&to&day liquidity management

OMO sale or purchase o) RBI on >o!n account?

In)luences the money supply , liquidity

Longer&term e))ect that LAF


13/13

C B L Os

Collaterali:ed Borro!ing and Lending O"ligations

Separates the claims o) a lender and the repaymento"ligations o) the "orro!ers

))ecti$ely makes the Claims # O"ligations liquid

Mechanism to "orro! and lend )unds againstsecurities )or the desired period

'lat)orm )or the lenders and "orro!ers to cometogether

ot only )or "anks "ut also )or primary dealers/)inancial institutions/ mutual )unds/ non&"anking)inance companies and corporatesD

mbfi risk management

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