Term paper on Liquidity Risk and Asset Liability Management of a commercial bank

Asset Liability Management is one of the much talked issues in the banking industry in some recent years because every financial institution has to keep some liquid assets to meet the daily need of the customers as well as the maintain the better profit from effective interest rate & foreign exchange risk management. The acceptance and management of financial risk is innate to the business of banking and banks’ roles as financial intermediaries. To meet the demands of their customers and communities and to execute business strategies, banks make loans, purchase securities, and take deposits with different maturities and interest rates. These activities may leave a bank’s earnings and capital exposed to liquidity crisis.
This exposure is liquidity risk. Changes in banks’ competitive environment, products, and services have heightened the importance of prudent liquidity risk management. Historically, the asset-liability environment for banks has been fairly ever changing, particularly in the decades following World War II. More recently, interest rates have become more volatile, and banks have arguably become more exposed to such volatility because of the changing character of their liabilities so they have to keep enough liquid assets to face the problem. For example, non-maturity deposits have lost importance and purchased funds have gained.

Banks are always wanted to maximize their profit with huge margin & maximum case they are successful in the making money for the future better-off. But the liquidity always confronted with the profitability but banks are sometimes wanted to make their huge profit with risking the whole liquidity condition & liquidity risk is the risk to earnings or capital arising from a bank’s inability to meet its obligations when they come due, without incurring unacceptable losses. Another problem created in the management of the bank that the banks are very vulnerable in the interest rate change in the market as well as the exchange rate fluctuations in the international markets. Interest rate change in the market create problem when the maturities of the rate sensitive assets aren’t match with the rate sensitive liabilities. It is also true that the longer the maturities of the interest sensitive assets & liabilities higher the risk of the banks. Exchange rate fluctuations often create worse position in the banks trading of the foreign currency & assets-liabilities & get fewer amounts & had to pay higher amount. Prime Bank Ltd emphasizes on the both the liquidity & profitability simultaneously so they always want to updated with the world class standard for risk measurement as well as management of the risk by guideline formulated by the Bangladesh Bank.

But in the recent years it is very much common for the banks to change their system because of the recent U.S credit crunch for assets liability maturity mismatch & huge foreign exchange loss create huge liquidity crisis following the worldwide financial turmoil. So it is very much important to use most important & suitable tool for the banks that faces greater demand of the liquid money with creating shield against the rates movement. This internship report has it in mind to dig the deepest about the liquidity, interest rate exposures & foreign exchange risk condition of the bank as well as how they manage the specific risks according to their nature.