Chapter Three: Balance Sheet Structure and Management

1. Chapter Three: Balance Sheet Structure and Management 3.1 Composition of the Balance Sheet • Asset-Liability Management (ALM): comprises strategic planning and implementation and control processes that affect the volume, mix, maturity, interest rate sensitivity, quality, and liquidity of a bank’s assets and liabilities. • Primary goal of ALM to produce a high-quality, stable, large and growing flow net interest income. • Goal accomplished by achieving the optimum combination and level of assets, liabilities, and financial risk.

2. 3.2 Asset Structure

3. 3.3 Liability Structure

4. 3.4 Managing Risk Effectively Key components of effective risk management: • An established line function at highest level of bank management hierarchy, specifically responsible for risk management. • An established, explicit, and clear risk management strategy and a related set of policies with corresponding operational target. • Appropriate formalization and coordination of strategic decision-making in relation to risk management process.

5. Bank business and portfolio decisions should be based on rigorous quantitative and qualitative analyses within applicable risk parameters. • Systematic gathering of complete, timely, and consistent data relevant for risk management, and provision of adequate data storage and manipulation capacity. • Development of quantitative modeling tools to enable the simulation and/or analysis of the effects of changes in economic, business, and market environments on a bank’s risk profile and the related impact on its liquidity, profitability, and net worth.