This document discusses liquidity risk management and regulatory requirements under Basel III. It begins by defining asset liability management (ALM) and its goals of arranging assets and liabilities without compromising liquidity or safety while maximizing profits. It then discusses various liquidity risk indicators required under Basel III like the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR). Interest rate risk management tools like simple sensitivity analysis and duration gap analysis are also outlined. The document notes liquidity management was not fully addressed in Basel II but is covered more rigorously in Basel III through these new standards and ratios.

1. Presented by:
Shah Naoaj
Assistant Director
Bangladesh Bank

2.  ALM is continuously arranging and
rearranging the assets and liabilities of the
bank without infringing the liquidity and
safety of the bank and with the purpose of
maximizing the bank’s profits

3. Liquidity Risk Management
Interest Risk Management
Currency risk Management:
Funding and capital Management:
Profit planning and growth

4. Capital protects your bank in rainy days!..

5.  Liquidity Risk:
Pillar II of Basel II defines the liquidity risk as
well as the tools and techniques to identify
the liquidity risk and capital charge against
liquidity risk.

6. REGULATORY LIQUIDITY INDICATORS (RLIS)
 Cash Reserve Requirement
(CRR),
 Statutory Liquidity Ratio (SLR),
 MediumTerm Funding Ratio
(MTFR),
 Maximum Cumulative Outflow
(MCO),
 Advance Deposit Ratio
(ADR)/Investment Deposit Ratio
(IDR),
 Liquidity Coverage Ratio (LCR),
 Net Stable Funding Raito
(NSFR).
BANK’S OWN LIQUIDITY MONITORINGTOOLS
 Wholesale Borrowing and
Funding Guidelines,
 Liquidity Contingency Plan
 Management Action
Trigger (MAT).
In Basel II Liquidity Management was not addressed properly which is
addressed more rigorously in Basel III.

7. INTEREST RATE RISK INTHE BANKING BOOK (IRRBB):
In the context of Pillar 2, the assessment of loss of equity value due to
IRRBB is vital as this is the outcome of poor asset liability management
that shows the inefficiency of the risk management framework of the
bank. Although currently in Bangladesh, there is no efficient and active
secondary market for any type of debt instrument (interest bearing
financial instrument), the evaluation of IRRBB on the basis of
hypothetical scenarios is essential for the appraisal of asset-liability
management and effectiveness of the risk management framework of a
bank.

8. SIMPLE SENSITIVITY ANALYSIS
 1. Calculate all on-balance sheet Rate
Sensitive Assets (RSA) and Rate Sensitive
Liabilities (RSL),
 2. Plot the RSA and RSL into different time
buckets on the basis of their maturity,
 3. Calculate the maturity gap by subtracting
RSL from RSA (GAP= RSL-RSA),
 4. Calculating the changes in the Net
Interest Impact (NII) by multiplying the
changes in interest rate with the Gap14.
DURATION GAP ANALYSIS
 1. Estimate the market value15of all on
balance sheet rate sensitive assets and
liabilities
 2. Calculate the durations of each class of
asset and the liability
 3. Arrive at the aggregate weighted average
duration of assets and liabilities,
 4. Calculate the duration GAP by
subtracting aggregate duration of liabilities
from that of assets,
 5. Estimate the changes in the economic
value of equity due to change in interest
rates on onbalance sheet positions along
with the three interest rate changes,
 6. Calculate surplus/ (deficit) on offbalance
sheet items under the interest rate change,
 7. Estimate the impact of the net change
As long as any efficient, vibrant and active secondary market for any debt instrument would be not established, capital charge is
not required for the negative change in the value of based on hypothetical assessment against IRRBB. When required capital
charge against IRRBB will be the loss of equity value due to changes in the market interest rate.The capital charge will be
calculated by netting off the capital charge for interest rate related instrument under Market Risk of Pillar-1.

9.  Introducing a global liquidity standard
 As with the global capital standards, the liquidity standards will establish
minimum requirements and will promote an international level playing field
to help prevent a competitive race to the bottom.
Key Objectives:
 The first objective is to promote short-term resilience of a bank’s liquidity
risk profile by ensuring that it has sufficient high quality liquid resources to
survive an acute stress scenario lasting for one month.The Committee
developed the Liquidity Coverage Ratio (LCR) to achieve this objective.
 The second objective is to promote resilience over a longer time horizon by
creating additional incentives for a bank to fund its activities with more
stable sources of funding on an ongoing structural basis.The Net Stable
Funding Ratio (NSFR) has a time horizon of one year and has been developed
to provide a sustainable maturity structure of assets and liabilities.

10.  Net Stable Funding Ratio:
 Key Challenge:
Basel Committee has issued the full text of the revised LiquidityCoverage Ratio (LCR) as one of the key component of the Basel
III capital framework.This new coming ratio will ensure that banks will have sufficient adequacy transformation level between
their stock of unencumbered high-quality assets (HQLA) and their conversion into cash to meet their liquidity requirements for a
30-calendar-day liquidity stress scenario (and thus hoping to cure shortcoming from Basel II that was not addressing liquidity
managemen
New regulations from Basel III requirements on new capital buffers and
liquidity ratios are increasing the pressure on bank's balance sheet