Liquidity, interest rate & foreign exchange risk measurement as well as management of the measured risk are very much tough tasks to be done. As banks are deals with the money of the other peoples banks have to take this thing very carefully because banks always have to think of two things one is survival & then run the business so to survive in the filed of the banking sector bank have to maintain better liquidity as well as better profit & here is the excellence of the bank how they effectively manage the amount of the fund to earn better quality. In Bangladesh it is common that banks aren’t maintaining actual asset-liability portfolio for the safety of the bank which I will discuss in the advancement of the study.
From the whole study one thing is come to me is that the bank is not very much attentive in the liquidity condition of the shorter term maturity. Because they are much depends on the longer term maturity assets which is less liquid in term of the other assets. I done some analysis based on the most sophisticated tools used in the worldwide financial industry like some well accepted ratios including the Advance Deposit Ratio, Provision Coverage Ratio, Commitments Total Assets Ratio etc. & Stress Testing based on the international best practices & also the check list of the well accepted banking association body where I found some risky position of the PBL. Here I also judge the actual condition of the risk measurement in the bank as well as the possible management condition based on that. I done my work based on the some secondary resources collected from the internet & bank itself & then I collected some new information from the observation as well as conversation with the official of the bank PBL so there are much deeper analysis that the traditional one.. In the interest rate exposure calculation I use the repricing model which shows the earning impact in the firm’s performance. Then I showed the maturity model to analyze the possible threat to the bank when the assets & liabilities are mismatched & then when the interest rate rise or fall what will be the impact in the firm. In the foreign exchange exposure measurement I showed the inter currency risks associated with the individual currency. So after the analysis I give some recommendations based on the core findings & analysis of the study to develop the asset-liability condition of the bank, PBL.
In whole Research Paper I tried to show the appropriate matching between the liquidity measurement and management and judge the liquidity management policies as an inspective view through the ALCO (Asset – Liability Committee) policy. Though it is not a best professional report because of its some limitations but as a unique report it consist some individual characteristics which make it as a lucrative one & I hope who want to go deeper about the asset-liability condition of the Bangladeshi banks this study can help them to understand deeper.
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.
1.2 Statement of the Problem:
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.
1.3 Rationale of the Study
Business world is shrinking in width so as the banking sector so it is necessary to cope up with the new environment. The assessment of various risks is now demanded and involvement of the risk management in the supreme management is mandated option of every updated organization. Liquidity risk management is the scale to determine the efficient liquidity management policy. So now a day’s most of the multi-disciplined financial institutions are interested about this policy to move their organization in a lucrative and emerging pinnacle. The rationales of the study for this report are given below:
The in general objective of the research is to bring up the liquidity risk measurement when they operating the bank & management of the liquidity risks, interest rate risks & foreign exchange risks.
The specific objectives are:
From the whole study one thing is come to me is that the bank is not very much attentive in the liquidity condition of the shorter term maturity. Because they are much depends on the longer term maturity assets which is less liquid in term of the other assets. I done some analysis based on the most sophisticated tools used in the worldwide financial industry like some well accepted ratios including the Advance Deposit Ratio, Provision Coverage Ratio, Commitments Total Assets Ratio etc. & Stress Testing based on the international best practices & also the check list of the well accepted banking association body where I found some risky position of the PBL. Here I also judge the actual condition of the risk measurement in the bank as well as the possible management condition based on that. I done my work based on the some secondary resources collected from the internet & bank itself & then I collected some new information from the observation as well as conversation with the official of the bank PBL so there are much deeper analysis that the traditional one.. In the interest rate exposure calculation I use the repricing model which shows the earning impact in the firm’s performance. Then I showed the maturity model to analyze the possible threat to the bank when the assets & liabilities are mismatched & then when the interest rate rise or fall what will be the impact in the firm. In the foreign exchange exposure measurement I showed the inter currency risks associated with the individual currency. So after the analysis I give some recommendations based on the core findings & analysis of the study to develop the asset-liability condition of the bank, PBL.
In whole Research Paper I tried to show the appropriate matching between the liquidity measurement and management and judge the liquidity management policies as an inspective view through the ALCO (Asset – Liability Committee) policy. Though it is not a best professional report because of its some limitations but as a unique report it consist some individual characteristics which make it as a lucrative one & I hope who want to go deeper about the asset-liability condition of the Bangladeshi banks this study can help them to understand deeper.
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.
1.2 Statement of the Problem:
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.
1.3 Rationale of the Study
Business world is shrinking in width so as the banking sector so it is necessary to cope up with the new environment. The assessment of various risks is now demanded and involvement of the risk management in the supreme management is mandated option of every updated organization. Liquidity risk management is the scale to determine the efficient liquidity management policy. So now a day’s most of the multi-disciplined financial institutions are interested about this policy to move their organization in a lucrative and emerging pinnacle. The rationales of the study for this report are given below:
- To apprehend theme, which drive the organization in emerging and stable condition.
- Face out practical dimension of Liquidity Management & Bank Liquidity Management environment.
- To know balancing need of Liquidity and Profitability effectively.
- To assess short term as well as the long term need of the banks in case of the bad situation & appraise Management efficiency through various liquidity aspects.
The in general objective of the research is to bring up the liquidity risk measurement when they operating the bank & management of the liquidity risks, interest rate risks & foreign exchange risks.
The specific objectives are:
- To apprehend how the bank measure the liquidity.
- To know how the bank measure need of the liquidity as well as the risk associated with it.
- To aware about the risk management technique followed by the bank for the liquidity related issues.
- To know the bank’s current condition about the liquidity by applying new tool.
- To dig deeper about the relationship among the liquidity & capital adequacy, total assets-liabilities, supervisors’ role.
- To know the interest rate movement & possible crisis for the bank.
- To know the foreign exchange position & possible problem for the bank.
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