Risk in the banking sector in simple terms means unpredictability, these risks are uncertainties which may result in adverse outcome in relation to planned objective or expectations of the financial institutions. In the financial world, risk can be defined as “any event or possibility of an event which can impair corporate earnings or cash flow over short, medium or long-term horizon” .

1. LIQUIDITY RISK MANAGEMENT:
COMPARATIVE ANALYSIS ON
INDIAN AND ASEAN
BANKS
Supervision by:
Dr. Rituparna Das,
Executive Director, Centre of Risk Management and Derivatives,
Director, Centre for Studies in Banking and Finance,
National law University, Jodhpur
Submitted by:
Nirmal Kapanee (Roll no. 604)
LL.M, 2nd Semester (Banking and Finance)
Batch (2014-2015)

2. RESEARCH METHODOLOGY:
Liquidity Risk Management (LRM) in Banks with the help of Asset
Liability Management (ALM) techniques used and the limitations set
by the central banks in accordance with the Basel III norms.

3. SOURCES OF RISK:
Sources of Risk in a Financial
Institution
Technology
Competition
Regulations
Political
compulsion
Market
Preferences
Economic
Changes
Business
Cycles
Decision/Indec
ision
Non
Availability
of
Information

4. RISK MANAGEMENT APPROACH:
Approaches to Risk management
Risk Avoidance Diversification Risk Transfer Risk Retention Risk SharingLoss Control
• Risk and higher profits go together, therefore expectations on higher profits may expose the bank to higher levels of risk.
• Due to this relation on risk and higher profits, different approaches towards risk management are followed by banks.

5. TYPES OF RISK:
Credit Risk
Market Risk
Solvency Risk
Operational Risk
Default Risk
Exposure Risk
Recovery Risk
Loss resulting from inadequate or
failed
Internal Processes
People
System
External Event
Inadequate Capital with bank to absorb losses
• Liquidity risk
• Interest rate risk
• Foreign Exchange risk
• Equity price risk
• Commodity price risk

6. ASSET LIABILITY MANAGEMENT (ALM):
 1) ALM is a coordinated management of a banks balance sheet involving risk caused by changes in interest rates,
exchange rate, credit risk and liquidity position of the bank.
 2) Its objective is to generate stable earning and to build equity over time of a bank while taking measured risk
through planning and directing the flow of fund in a financial institution.
 3) It is an integrated balance sheet management where all the components of balance sheet and its different
maturity mix will be looked at from a profit perspective for the bank.
 4) ALM is a integrated approach by bank financial management requiring decisions about the types and amount of
financial assets and liabilities it holds regarding its mix and volume.
Reasons for the significance of asset liability management for Financial Institutions:
(i) Volatility
(ii) Product innovation
(iii) Regulatory environment
(iv) Management recognition

7. 2-7 DAYS TIME BUCKET : OUTFLOWS AND
INFLOWS AS ON 30.09.08
2-7 Days Outflow
Table : Break-up of 2-7 Days Graph : Break-up of 2-7 Days outflow as on 30.09.08
outflow as on 30.09.08
2-7 Day Outflow Rs. (crore)
Deposits 570.47
Other liabilities and
Provision 36.33
Un-availed portion
of Cash Credit 125.66
Letter of
Credit/guarantees 0.56
Swaps 211.56
Interest Payable 1.26
Total 945.84

8. 2-7 Days Inflow
Table : Break-up of 2-7 Days Graph : Break-up of 2-7 Days inflow as on 30.09.08
inflow as on 30.09.08
2-7 Day Inflow
Rs.
(crore)
Balance with RBI 52.66
Investments 566.54
Advances 276.56
Swaps 154.55
Interest
Receivable 27.45
Others 91.64
Total 1169.4
Inference :
Inflows are more than the outflows and create a positive gap (Rs. 223.56 crore). The net gap as a
percentage of outflow is 23.64% which is within the tolerance limit set by the RBI. This is mainly
due to investments, cash credit/overdraft/loan repayable on demand and swaps which constitute the
maximum percentage of inflows.

9. 8-14 DAYS TIME BUCKET : OUTFLOWS
AND INFLOWS AS ON 30.09.08
8-14 Days Outflow
Table : Break-up of 8-14 Days Graph : Break-up of 8-14 Days outflow as on 30.09.08
outflow as on 30.09.08
8-14 Days Outflow Rs. (crore)
Deposits 905.36
Other liabilities and
Provision 38.56
Unavailed portion
of Cash Credit 366.54
Letter of
Credit/guarantees 0.85
Swaps 8.66
Interest Payable 2.22
Total 1322.19

10. 8-14 Days Inflow
Table : Break-up of 8-14 Days Graph : Break-up of 8-14 Days inflow as on 30.09.08
inflow as on 30.09.08
8-14 Days Inflow Rs.(crore)
Balance with RBI 98.16
Investments 475.56
Advances 252.69
Swaps 6.89
Interest
Receivable 22.56
Others 91.64
Total 947.5
Inference :
Outflows are more than the inflows and create a huge negative gap (Rs. 374.71 crore). The net gap
as a percentage of outflow is (-28.34%) is not within the tolerance limit set by the bank. This was
mainly due to huge deposits and un-availed portion of cash credits which constitute the maximum
percentage of outflows.

11. BASEL III PILLARS (COMPARISON WITH BASEL II):
Minimum
capital
requirement
Supervisory
review
process
Disclosure
and market
discipline
Enhanced
minimum
capital and
liquidity
requirement
s
Enhanced
supervisory
review for
risk
manageme
nt and
capital
planning
Enhanced
risk
disclosure
and market
discipline
BASEL II
BASEL III

12. LIQUIDITY COVERAGE RATIO (LCR):
 These are highly liquid assets held by banks in order to meet short term obligations to insure that banks have
necessary assets in hand in case of short term liquidity disruptions.
 Banks are required to hold an amount of highly liquid assets (HQLA) equal to or greater than their net cash over
a 30 day period (having at least 100% coverage).
 It is based on traditional liquidity “coverage ratio” methodologies used internally by banks to assess exposure to
contingent liquidity events.
 During period of financial stress banks may use their stock of HQLA, therefore falling below 100%, as
maintaining the LCR of 100% under such stress scenario can produce undue negative effect for the bank.
Components of an LCR:
(i) Value of the stock of HQLA in stressed conditions
(ii) Total net cash outflows over the next 30 calendar days under the prescribed stress scenario.

13. IMPORTANT ELEMENTS IN LRM USED BY ASEAN COUNTRIES:
1) liquidity policy
2) Stress test and scenario analysis
3) Contingency funding plans
4) Setting of limits
5)Reporting requirements
6) Public disclosure

14. ASEAN COUNTIRES COMPARISION ON BASEL NORMS:
ASEAN COUNTRIES BASEL I BASEL II BASEL III
SINGAPORE ADOPTED ADOPTED STARTED
MALAYSIA ADOPTED ADOPTED STARTED
THAILAND ADOPTED STARTED ADOPTED
INDONESIA ADOPTED STARTED ADOPTED
PHILIPPINES ADOPTED ADOPTED STARTED
BRUNEI DARUSSALAM ADOPTED DEFERRED NOT STARTED
CAMBODIA ADOPTED MODIFIED SOLVENCY
RATIO
NOT STARTED
LAO PEOPLES
DEMOCRATIC
REPUBLIC
IMPLEMENTED NOT STARTED NOT STARTED
MYANMAR NOT STARTED NOT STARTED NOT STARTED
VIETNAM ADOPTED UNDER
CONSIDERATION
NOT STARTED

15. CONCLUSION (HYPOTHESIS FINDINGS):
1) Banks with a better capitalization have a lower liquidity risk exposure: It is accepted only for the long term
liquidity measure.
2) Bigger banks present a lower liquidity risk exposure: It must be refused, because as analysed, the bank size
presents a negative relationship with liquidity measures. This may be the result of to the too big to fail theory,
since bigger banks think that even if they have not sufficient liquidity, in cases of emergency they will be saved
from the lender of last resort.
3) Banks specialized in lending activity have a higher liquidity risk exposure: This must be accepted because
banks more specialized in lending activities have a more vulnerable funding structure.
4) During a financial crisis banks have a higher exposure to liquidity risk: It can be accepted only with regard
to the (Liquidity Coverage Ratio) LCR, and thus the crisis impacts only on the short term liquidity risk
management; this may indicate that during the financial crisis banks are more likely to manage the liquidity on
short horizon because problems in this period can cause serious solvency problems for banks in particular, and
for the financial system in general.

16. Thank you