asset liability risk

management policy
REVISED EDITION DECEMBER, 2020
 Table of Contents
Contents Page No.
CHAPTER-01: POLICY STATEMENT 1-11
1.1 Overview 1
1.2 Basel III Liquidity Ratios 1
1.2.1 Liquidity Coverage Ratio (LCR) 2
1.2.1.1 Definition of LCR 2
1.2.1.2 LCR Equation 2
1.2.2 Net Stable Funding Ratio (NSFR) 2
1.2.2.1 Definition of NSFR 3
1.2.2.2 NSFR Equation 3
1.3 Leverage Ratio 3
1.4 Other significant policy statements 3
1.4.1 Advance to Deposit Ratio (ADR) 4
1.4.1.1 ADR Equation 4
1.4.1.2 ADR for Islamic banking operation of conventional operation 4
1.4.1.3 Adjustment of the AD ratio limit 4
1.4.2 Wholesale Borrowing Guidelines (WBG) 5
1.4.2.1 WB Limit 5
1.4.2.2 Scope of WB Limit 5
1.4.3 Commitments 5
1.4.3.1 Commitment Limit 5
1.4.3.2 Scope of Commitment Limit 6
1.4.4 Structural Liquidity Profile (SLP) 6
1.4.4.1 Maximum Cumulative Outflow (MCO) 6
1.4.4.2 Maximum Cumulative Outflow (MCO) Report 6
1.4.4.3 MCO Equation 7
1.4.4.4 Scope of MCO 7
1.4.5 Interest Rate Risk Management 7
1.4.5.1 Types of interest rate risk 7
1.4.5.2 IRR Management 8
1.4.5.3 Analytical Tools 8
1.4.5.4 Stress Testing 9
1.4.5.5 Interest Rate Risk Limit 10
1.4.6 Swapped Funds Limit 10
1.4.7 Contingency Funding Plan (CFP) 10
1.4.8 Compensation Plan for long-term profitability over short-term profitability 11
CHAPTER-02 TREASURY OPERATION MANUAL AND ORGANIZATION OF ALCOM 12-19
2.1 Treasury Operation 12
2.2 Key Roles and Responsibilities of the Treasury Division 12
2.2.1 Activities of four segment of Treasury Division 12
2.2.2 Segregation of Treasury Function 13
2.2.3 Process Flow of Treasury 13
2.3 Clearance regarding availability of funds from the Treasury Division 14
2.4 Head of Treasury: Experience, responsibilities and reporting line 15
2.5 Organogram of Treasury 16
2.6 Operational Risk Management 17

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 Contents Page No.
2.7 Mandatory leave 18
2.8 Internal Audit 18
2.9 Organization of ALCOM 18
2.10 Organizational structure of ALCOM 19
2.11 Key Roles and Responsibilities of the ALM Desk 19
CHAPTER-03: THE ALCOM PROCESS 20-24
3.1 Constitution of the ALCOM 20
3.1.1 ALCOM Meeting 20
3.1.2 Key Agenda of ALCOM meeting 20
3.1.3 ALCOM Paper 21
3.1.4 Responsibility of related divisions 24
3.2 Major Issues 24
3.2.1 Market Risk 24
3.2.2 Liquidity Risk 24
CHAPTER-04: Wholesale Borrowing Guidelines 25-27
4.1 Overview of Wholesale Borrowing Guidelines (WBG) 25
4.2 Products 25
4.3 Counterparty for Wholesale Borrowing (WB) 26
4.4 Fund Concentration 26
4.5 Capacity 26
4.6 Wholesale Borrowing (WB) Limit 26
4.7 Scope of WB Limit 26
4.8 Roles & Responsibility of WB Manager 27
4.9 Risk Involved with WB 27
CHAPTER-05: Contingency Funding Plan 28-34
5.1 Overview of Contingency Funding Plan (CFP) 28
5.2 Contingency Action Plan to Manage Stressed Liquidity 29
5.3 Contingency Management Team (CMT) 29
5.4 Phase-1: Impending Crisis 30
5.5 Phase-2: Crisis Situation 30
5.6 Phase-3 Assessment & Action 31
5.7 Critical Contact Information 32
5.8 Summary of Regulations, Contingency Liquidity Sources and Funding Plan 33
CHAPTER-06: Management Action Trigger 35-39
6.1 Introduction 35
6.2 Definition of Management Action Trigger (MAT) 35
6.3 Points: While plan is applicable 36
6.4 Management Action Trigger Team (MATT) 39
6.5 Conclusion 39
CHAPTER-07: Liquidity Management 40-49
7.1 Liquidity Risk 40
7.2 Liquidity risk indicators 40
7.3 Managing liquidity risk 40

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 Contents Page No.
7.4 Board oversight 41
7.5 Senior management oversight 41
7.6 Liquidity risk strategy 42
7.7 Liquidity Policies 43
7.8 Procedures and limits 44
7.9 Liquidity management structure 45
7.10 Liquidity risk management process 45
7.11 Management Information System (MIS) 45
7.12 Periodic reviews 46
7.13 Measurement of liquidity risk 46
7.14 Maturity Ladder 47
7.15 Liquidity ratios and limits 48
7.16 Foreign currency liquidity management 49
7.17 Internal controls 49
7.18 Monitoring and reporting risk exposures 49
CHAPTER-08: Market Risk Management 50-68
8.1 Overview of Market Risk 50
8.2 Interest rate risk 50
8.3 Equity risk 61
8.4 Managing market risk 68
8.5 Stress testing 68
CHAPTER-09: Interest Rate Policy 69-74
9.1 Overview of Interest Rate Policy 69
9.2 Market-based Factors 69
9.3 Economic Factor 69
9.4 Client Inputs 70
9.5 A Summary of Different Interest Rates 70
9.6 The Bottom Line 70
9.7 Fund Transfer Pricing (FTP) 70
CHAPTER-10: Investment Policy 72-74
10.1 Overview of Investment Policy 72
10.2 Liquidity 72
10.3 Profitability 73
10.4 Diversity 73
10.5 Marketability of Securities 73
10.6 Stability in the Value of Investments 73
10.7 Principles of Tax-Exemption of Investments 74
CHAPTER-11: Methodology of Setting Limit 75-78
11.1 Methodology for Setting Counterparty Limit 75
11.2 Procedures and Limits 75
11.2.1 Limits for Local Currency Dealing 75
11.2.2 Limit for Foreign Exchange Dealing 77

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 Contents Page No.
CHAPTER-12: Trading of Govt. Securities 79-84
12.1 Procedure of Govt. Securities Trading 79
12.2 Trading of Govt. Securities 79
12.2.1 Primary Auction 79
12.2.2 Secondary Trading 80
Appendix-I: Form & Formats 81-92
Appendix-II: Glossary of Financial Terms 93-109
References 110

iv
 ASSET-LIABILITY RISK MANAGEMENT (ALM)
POLICY

Working Committee

Chairman
Mr. Md. Anisur Rahman, Deputy Managing Director, Agrani Bank Limited, Head Office,
Dhaka

Member Secretary
Mr. Md. Mokhlesur Rahman, Assistant General Manager & Head of Treasury, Agrani
Bank Limited, Head Office, Dhaka

Members

1. Mr. Md. Abdus Samad Patwary, Deputy General Manager, IT&FCMD, Agrani Bank
Limited, Head Office, Dhaka

2. Mr. Md. Humayun Kabir, Assistant General Manager, IT&FCMD, Agrani Bank Limited,
Head Office, Dhaka

3. Mr. Bishwajit Das, Assistant General Manager, Risk Management Division, Agrani Bank
Limited, Head Office, Dhaka

4. Mr. Md. Maniruzzaman, Assistant General Manager, Treasury Division, Agrani Bank
Limited, Head Office, Dhaka

v
 CHAPTER-01: POLICY STATEMENT

1.1 Overview
Asset Liability Risk Management (ALM) is the key financial and risk management discipline.
As one of the core risk areas identified by the Bangladesh Bank, ALM requires senior
management responsibilities in order to control both inherent and acquired risks in the
balance sheet and in day-to-day operations. ALM involves planning, directing and
controlling the sources and usage of the funds of the bank.

Asset Liability Risk Management (ALM) policy discusses the significant risks related to the
balance sheet and prescribes a comprehensive framework that is established to allow
management to inform business strategy and guide day-to-day operations. In addition,
core ALM topics and a glossary of terms have been incorporated in the appendices for
further reading and training purposes.

Finally, due to the evolving nature of ALM practices and the attendant regulation that
follows the introduction of new financial instruments and transactions, this policy requires
updating from time to time.

This policy is the exclusive property of the ABL. Accordingly, its circulation and use is strictly
limited to authorized personnel in the course of bank-related operations and
administration.

The following policies are set for the bank to comply with Bangladesh Bank (BB) Guidelines:

1.2 Basel-III Liquidity Ratios:

The Basel Committee introduced liquidity standards as a part of the Basel III capital regime,
including the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).
Bangladesh Bank has also issued separate guidance note on LCR and NSFR under Basel-III.
The effect was to increase bank's short and long-time resilience. The LCR addresses
whether banks have adequate high-quality liquid assets to survive stressed liquidity
conditions over a 30-day period, while the NSFR guides banks to adopt more stable sources
of funding over the long time. As per the guidance note of Bangladesh Bank, ABL also
measures these ratios that are central to liquidity measurement and management.

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1.2.1 Liquidity Coverage Ratio (LCR):

Liquidity Coverage Ratio (LCR) is built on the methodologies of traditional liquidity

coverage ratio used by banks to assess exposure to contingent liquidity events. The
minimum acceptable value of this ratio is 100% set by Bangladesh Bank. LCR of ABL was
at 311.20% on 30/09/2020. Liquidity Coverage Ratio of ABL has been set at 125% to
300%. To attain the target level, the bank can improve ADR by increasing quality
lending and shifting short term investment into relatively longer-term bucket.

1.2.1.2 Definition of LCR:

The calculation of the LCR requires three important quantities to be defined:

A. Total value of stock of high-quality liquid assets

B. Total cash outflows of next 30 days (stressed scenario)

C. Total cash inflows of next 30 days (stressed scenario)

LCR requirement is met if A is greater than (B – C) i.e., if high quality liquid assets
exceed net cash outflows under the stressed scenario. To make the metric even more
conservative, C is capped at 75 percent of B.

1.2.1.3 LCR Equation:

Stock of high-quality liquid assets

LCR = ≥ 100%
Total net cash outflows over the next 30 calendar days

Here, Stock of high-quality liquid assets = A

And Total net cash outflow over the next 30 calendar days = (B–C)
Where, C is maximum 75% of B

1.2.2 Net Stable Funding Ratio (NSFR):

Net Stable Funding Ratio (NSFR) aims to limit over-reliance on short-term wholesale
funding during times of abundant market liquidity and encourage better assessment of
liquidity risk across all on and off-balance sheet items. The minimum acceptable value of
this ratio is 100 percent, indicating that Available Stable Funding (ASF) is at least equal to
Required Stable Funding (RSF). NSFR of ABL was at 101.78% on September 2020. The NSFR
of the bank has been set at 103% to 120%.

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1.2.2.1 Definition of NSFR:

The calculation of the NSFR requires two quantities to be defined:

A. Available Stable Funding (ASF)
B. Required Stable Funding (RSF)
NSFR is met if ASF exceeds RSF i.e., if ASF/RSF > 1 or 100%.

1.2.2.2 NSFR Equation:

Available Amount of Stable Funding (ASF)

NSFR = > 100%
Required Amount of Stable Funding (RSF)

1.3 Leverage Ratio:

The Basel committee considered it convenient to introduce a ratio to complement the

traditional capital ratios, capable of offering a measure of an Institutions capital quality.
This was how the leverage ratio came about. A minimum Tier 1 leverage ratio of 3% is
being prescribed by BB both at solo and consolidated level. Banks have to maintain
leverage ratio on quarterly basis. The ratio is defined as-

Tier 1 Capital
Leverage Ratio =
Total Exposure

[*after related deductions]

(*=related deductions will be as per "Guidelines on Risk Based Capital Adequacy: Revised
Regulatory Capital Framework for banks in line with Basel-III" issued by BB in December
2014)

1.4 Other significant policy statements:

To facilitate the ALM process, the Board of the Bank has set other policy statements
(keeping in mind the minimum requirements of LCR, NSFR and Leverage ratio) for the
followings and conduct an annual review (at least) taking into consideration the changes in
the balance sheet and market dynamics.

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1.4.1 Advance to Deposit Ratio (ADR):

Advance to Deposit Ratio is determined by putting Advance in numerator and Liabilities

(excluding capital) in denominator. The ratio is fixed in such a manner so that there are
no unnecessary liquidity pressure on the bank in any point of time. Considering the
regulatory liquidity requirements (CRR and SLR), the maximum value of the ratio will be
derived using the formula [100%-CRR*-SLR*]. Depending upon the capital base,
liquidity condition, NPL status and above all the maintenance of LCR & NSFR, the board
may decide adding highest 4%* and 2%* for conventional and shariah based banks
respectively with the result of the above formula to fix a suitable AD ratio. As per
present liquidity position, ADR for conventional banking of ABL has been set at 60% to
70%.

To keep ADR at 60% to 70%, ABL will take up the following strategies:
 Increasing quality lending
 Introducing new loan products

1.4.1.1 ADR Equation:

The formula for calculating ADR is as follows-

Total Loans and Advances

ADR =
(Total Demand and Time Liabilities + Interbank deposit surplus)

Interbank deposit surplus = Deposit from other banks-Deposit with other banks (if
negative then 0)

ABL follows the instruction of BB regarding deduction of some items to calculate total
loans and advances while calculating ADR. Total Demand and Time liabilities to be
calculated according to DOS Circular No.01/2014.

1.4.1.2 ADR for Islamic banking unit of the bank:

ABL has separate Islamic Banking Unit (IBU). The bank has to calculate and maintain
ADR separately for IBU according to the Islamic Shariah based banking regulation.

1.4.1.3 Adjustment of the AD ratio limit:

It is important to adjust AD ratio limit with changing condition of the Banks' assets and
liabilities. The Management of the bank has to inform the board regarding AD ratio in
every meeting. So that the board will take quick decision and necessary steps to adjust
the ratio.

[Note: 1. ** depends on SLR fixed by BB from time to time

2. * CRR = bi-weekly rate as decided by BB from time to time (Current CRR is 4.00%)
3. * SLR = as decided by BB from time to time (Current SLR is 13.00%)]

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1.4.2 Wholesale Borrowing Guidelines (WBG):

The aim of Wholesale Borrowing Guidelines (WBG) is to set a limit for borrowed fund. The
limit should be set in absolute amount based on bank's eligible capital (Tier-1 & Tier-2) and
considering liquidity needs due to maturity mismatch, borrowing capacity of the bank and
historic market liquidity.

1.4.2.1 WB Limit:

WB covers call borrowing, Short Notice Deposit from banks and financial institutions,
placement received with maturity less than 12 months, commercial papers/similar
instruments and overdrawn nostro accounts. As a member of Primary Dealers Bangladesh
Limited (PDBL), the WB Limit of ABL is capped at 100% of bank's eligible capital on
fortnightly average basis with maximum two deviations (not more than 110% of the eligible
capital of the bank) in a particular fortnight. The eligible capital determined under Basel-III
for any quarter will be applicable as eligible capital until it is determined for the next
quarter.

1.4.2.2 Scope of WB Limit:

The above limit is considered as an aggregate limit for banks having dual businesses (i.e.,
both conventional and Islamic banking operation). The details of WB guidelines of ABL is
included in Chapter-04.

1.4.3 Commitments:

Total Commitments include undrawn portions of continuous loan including interest

thereon and undrawn portions of term loans, outstanding irrevocable letters of credit and
similar instruments, letters of guarantee, acceptances and similar instruments. Counter
guarantee provided by foreign banks with BB rating grade 1 or similar, awarded by
recognized (by BB) international credit rating agencies against any guarantee, FC held
against Back-to-Back LC and Margin on LC or guarantee shall be deducted from the total
commitment amount.

1.4.3.1 Commitment Limit:

The commitment limit is calculated by considering the following three important ratios:
i) Total Commitments to Total Assets
ii) Total Commitments to Total Eligible Capital
iii) Total Commitments to Total High Quality Liquid Assets (HQLA)

The highest acceptable limits of these ratios are less than 50%, 500% and 250%
respectively. The commitment limit will be the lowest amount of these three ratios.

As on 30/11/2020 Total Asset of ABL was Tk. 1,03,345.45 crore, Total Eligible Capital was
Tk. 2,786.81 crore in September quarter, 2020 & Total High Quality Total Asset (HQLA) was
Tk. 28,636.91 Crore on 30/11/2020. As per BB guidelines, Currently, the commitment limit
of ABL is Tk.13,934.00 crore which will change as per the changes of above three ratio.

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1.4.3.2 Scope of Commitment Limit:

The above limit is considered as an aggregate limit as the bank has dual businesses (i.e.,
for both conventional and Islamic banking unit).

1.4.4 Structural Liquidity Profile (SLP):

The Structural Liquidity Profile (SLP) of the bank provides information regarding
maturity transformation of assets and liabilities in a simple manner. The negative
liquidity GAP, derived by considering assets and liabilities both in local and foreign
currencies, can be taken as a preliminary signal for the need of maturity adjustment of
assets and liabilities in different time buckets. The Maximum Cumulative Outflow
(MCO) ratio is considered as an important benchmark in this regard.

1.4.4.1 Maximum Cumulative Outflow (MCO):

MCO reflects the maximum cumulative outflow against total assets in a maturity
bucket. MCO up to one-month bucket will not be greater than the sum of daily
minimum CRR plus SLR. For example, at the present rate of CRR and SLR, the MCO of
ABL is 17.00% (4.00% CRR+ 13% SLR) for conventional banks.

If the set limit breaches ABL will manage MCO in the following manner:
a) Campaign for deposit mobilization
b) Sale of securities
c) Sanction of large loan may be restricted
d) Launch new lucrative deposit products

This liquidity risk measurement system not only helps the bank in managing liquidity in
times of crisis but also optimize return through efficient utilization of available funds.
ABL try to institute a system that can enable the bank to capture liquidity risk ahead of
time, so that appropriate remedial measures could be prompted to avoid any
significant losses.

1.4.4.2 Maximum Cumulative Outflow (MCO) Report

The following sequence of activities are performed to prepare a liquidity gap report of
ABL:
 Segregate assets and liabilities into different time buckets based on their
remaining maturities
 Place all assets and liabilities in their appropriate time buckets
 Identify the number of time buckets
 Subtract maturing liabilities from maturing assets in order to determine the
liquidity gap, under each bucket
 Compute the cumulative liquidity gap

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1.4.4.3 MCO Equation:

The formula for determining Maximum Cumulative Outflow in one-month bucket is-

Total outflow up to one month +Total OBS up to one month

MCO =
Total inflow + Net Nostro account balance + Available foreign currency balance with BB

1.4.4.4 Scope of MCO:

Islamic Banking Unit (IBU) of ABL also prepare combined SLP and MCO for better
understanding of the overall position of the bank.

1.4.5 Interest Rate Risk Management

Interest rate risk (IRR) can be defined as decline in earning or in the bank’s portfolio value
due to interest rate fluctuations. Most of the balance sheet items generate revenues and
costs which are indexed to interest rates, but these rates are unstable over time. IRR is
treated as the key part of business activity for the bank.

1.4.5.1 Types of interest rate risk

IRR can be roughly decomposed into four categories. They are:

i. Re-Pricing Risk

Re-pricing risk refers to fluctuations in interest rate levels that have differing impacts on
bank assets & liabilities. For example, a portfolio of long-term, fixed-rate loans funded with
short-term deposits could significantly decrease in value when rates increase, since the
loan payments are fixed and funding costs have increased.

ii. Yield Curve Risk

Yield curve risk refers to changes in the portfolio values caused by unanticipated shifts in
the slope and shape of the yield curve. For example, short-term rates might rise faster than
long-term rates, thereby clearly affecting the profitability of funding long-term loans with
short-term deposits.

iii. Basis Risk

Basis risk refers to the imperfect correlation between index rates across different interest
rate markets for similar maturities. For example, a bank funding loans whose payments are
based on Treasury Bills with deposits priced on a different basis is exposed to the risk of
unexpected changes in the spread between these two indexes.

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iv. Optionality

Optionality refers to risks arising from interest rate options embedded in assets,
liabilities and off-balance sheet positions. Such options can be explicitly purchased from
established markets for interest rate derivatives or included as terms within a loan
contract, such as the prepayment options included in many types of loans and
mortgages.

1.4.5.2 IRR Management

IRR management is one of the key strategies and policy issues for the portfolio
management of the bank. If the bank has more rate-sensitive liabilities than assets, a
rise in interest rates would reduce profitability, while a decline in interest rates will
increase the profit of the bank.

The main objectives in managing interest rate risk are:

 to ensure an optimal and stable income stream while controlling risks within
tolerable parameters.
 to manage the level of the exposure to adverse movements of interest rate in
order to limit the potential impact thereof.

a) Key Indicators of IRR

 Net Interest Income (earning perspective).

 Market Value of Equity (economic value perspective).

b) Sources of Interest Rate Risk

 Regulatory environment
 Government policy related to economic growth indicators
 The size and sources of interest-bearing assets and liabilities.
 Liquidity risk
 Market and Operational risk
 Credit risk

1.4.5.3 Analytical Tools

The following analytical tools are associated with addressing the interest rate risk:

a) Gap Analysis

Gap analysis is also a method of asset-liability management that can be used to assess
interest rate risk (IRR) or liquidity risk, excluding credit risk. It is a simple IRR
measurement method that conveys the difference between rate-sensitive assets and
rate-sensitive liabilities over a given period of time.

Page 8 of 110
b) Duration Analysis

Duration analysis is a useful concept because it provides a good approximation of the

sensitivity of a security's market value to a change in interest rates over time where %
change in market value of security = % change in interest rate X duration in years.

For example, if the average duration of a bank’s assets is 5 years, and the average duration
of its liabilities is 3 years, a 5 percent increase in interest rates will cause the market value
of its assets to fall by 25% (5% x 5 Years) and the market value of the liabilities to decline by
15% (5% x 3 years). The net result is that the net worth has declined by 10% of the total
original assets value. Similarly, 5 percent decline in interest rate increases the net worth by
10% of the total asset value.

There are generally two approaches to assess aggregate IRR exposures across various
business lines and portfolios –

 Traditional earnings approach: Traditional earning approach focuses on how

interest rate changes the bank’s overall earnings, which are typically
measured as net interest income (difference between total interest income
and total interest expenses). Traditional earnings approach is calculated by
the following formula:
Interest Earnings – Interest Expenses
Earning Assets

 Economic value approach: The economic value approach takes a broader

perspective on IRR management by focusing on how interest rate changes
affect total expected net cash flow from all of the bank’s operations. Thus,
this approach examines expected cash flows from assets minus expected
payments on liabilities plus the expected net cash flows from off-balance
sheet positions. This approach is more challenging to conduct since, at a
minimum, it requires collecting and aggregating more data; at the same
time, however, it provides greater insight into a bank’s aggregate IRR
exposure.

In addition to aggregate IRR management approaches, there are also more focused
measurement techniques used for derivatives and other instruments with more complex
risk profiles such as mortgage-backed securities. These techniques explicitly use
mathematical models of interest rate dynamics with respect to various index rates and
their yield curves.

1.4.5.4 Stress Testing

Stress testing is an analysis conducted under hypothetical scenarios designed to determine

whether a bank has enough capital to withstand a negative economic shock. These
scenarios include unfavorable situations, such as a deep recession or a financial market
crash. Stress testing techniques provide a way to qualify the impact of changes in a number
of risk factors on the assets and liabilities portfolio of the bank. An effective management

Page 9 of 110
 information that ensures flow of information to the senior management to take proper
measures to avoid certain extreme conditions.

As a starting point the scope of the stress test is limited to simple sensitivity analysis and it
carried out assuming three different hypothetical scenarios:

 Minor Level shocks: These represent small shocks to risk factors.

 Moderate shocks: It envisages medium level of shocks and the level defined
in each risk factor separately.

 Major level shocks: It involves big shocks to all risk factors and also depends
separately for each risk factor.

Stress testing ensure the soundness and sustainability of the bank and make the bank
more shock resilient.

The stress testing policy of ABL enables to accurately assess risk and define the risk
appetite of the bank and also provide critical information to senior management for
decision around capital allocation and contingency planning.

1.4.5.5 Interest Rate Risk Limit:

The BoD of ABL set a limit on the interest rate risk in the banking book. The limit set on
the basis of the risk appetite of the bank. The BoD of ABL also set the Management
Action Trigger (MAT) Plan included in Chapter-06 to reduce interest rate risk. The detail
of interest rate risk limit is included in Chapter-09.

1.4.6 Swapped Fund Limit:

Swapped fund is the difference between assets and liabilities including capital
denominated in the same currency. Assets and liabilities will not always in the same
currencies. The Bank exposed to the risk that may not meet by its currency-wise
obligations as they fall due. Swapped fund position results from reliance on foreign
exchange markets and therefore needs to be controlled. Swapped fund limits are
established on the maximum amount that may be swapped out of foreign currency into
local currency and swapped out of local currency into foreign currency. Swapped fund
limit for Buy-Sell SWAP of the bank has been set up to USD 150.00 million. In stress
scenario, Head of Treasury may change the swapped fund limit with the approval of
line management.

1.4.7 Contingency Funding Plan (CFP):

ABL has a liquidity contingency funding plan to address unforeseen circumstances in its
operations and in the environment. The CFP of ABL is designed to take care of changes
in the balance sheet composition. Detail Contingency Funding Plan (CFP) is included in
Chapter-05.

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1.4.8 Compensation Plan for long-term profitability over short-term profitability:

ABL focuses on long-term profitability over short term profitability for obtaining specific goals
that lead to increased shareholder’s value. Long-term compensation plan of ABL guides long-
term growth of business by evolving in predetermined and potentially lucrative directions. So,
the compensation plan for long-term profitability over short term profitability acts as a kind of
insurance against bad profits for any financial institutions specially in banking sector.

Page 11 of 110
 CHAPTER-02: TREASURY OPERATION MANUAL AND ORGANIZATION OF ALCOM

2.1 Treasury Operation

The operational risk management framework for treasury activities of ABL includes the
following elements:
 a strong governance structure that safeguards the integrity of Treasury
 comprehensive policies and procedures
 effective internal compliance and controls
 effective regulatory compliance and controls
 a reliable Management Information System (MIS) that facilitates the comprehensive
monitoring and timely reporting of exposures
 a robust process for dealing with counterparts
 Profit maximization through proper liquidity management and investment

2.2 Key Roles and Responsibilities of the Treasury Division:

In accordance with the international standard, best practices and guidelines of Bangladesh
Bank for Core Risk Management Policy, ABL structured its treasury management operations
into four segment as below:
i) Money Market (MM)
ii) Foreign Exchange (FX) Market
iii) Investment Desk
iv) Asset Liability Management Desk

2.2.1 Activities of four segment of Treasury Division:

i. Money Market Activity:
Money Market (MM) Desk of Agrani Bank Limited is one of the most active and well-organized
desk generating handsome revenue for the bank. This desk is playing vital role in treasury
division. The main function of Money Market desk is liquidity management and maintenance
of CRR and SLR as per regulatory requirement. Other important functions of Money Market
desk is to participate Bangladesh Bank's auctions of Treasury Bills/Bonds. Besides these Money
Market desk is also engaged in overnight transactions (call money) as-well-as short term
funding like repo, reverse repo, term placement etc. As a member of PDBL money market also
deals with all kinds of Govt. approved securities in primary and secondary market.

ii. Foreign Exchange Market Activity:

The Foreign Exchange Desk of Agrani Bank Limited plays dynamic and effective role in
interbank Foreign Exchange operations like spot, forward, swap, term placement and need
based other cross currency deal. Foreign Exchange desk is devoted in buying and selling of
various foreign currencies for managing Foreign Exchange exposure and to mitigate risks. The
desk also innovates with need based foreign currency dealing and quoting rates to customers
and exchange houses/correspondents. At the same time, as per regulatory requirement
Foreign Exchange desk has to maintain the Net Open Position (NOP) limit of foreign currency.

iii. Investment Desk Activity:

Investment desk operates investment in equity, share, commercial paper, bridge financing and
subordinate bond. By which investment desk plays a vital role in maximizing the profit of the
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bank.

iv. Asset Liability Management Activity:

In compliance with Bangladesh Bank Guidelines, the bank has an Asset Liability Management
(ALM) Policy. According to the policy, Agrani Bank Limited has a dedicated committee to deal
with Asset-Liability Risk Management, called the Asset Liability Committee (ALCOM). The
ALCOM generally meets at least once in every month and reviews liquidity requirement,
deposit mix, key liquidity ratios, the maturity profile of assets and liabilities, deposit and loan
pricing strategy, transfer pricing, sensitivity of assets and liabilities, key management
indicators, balance sheet analysis, commodity price and overview of the market as per
Bangladesh Bank's Guidelines.

2.2.2 Segregation of Treasury Function:

ABL strictly enforce the segregation of front office risk taking activities from mid office
monitoring and back office settlements, as a matter of operational control over the investment
of liquid funds.

 Treasury Front Office: As a risk-taking unit, Treasury Front Office both for Money
Market and FX Market deals with operational activities maintain liquidity and net open
position. At the same time, it quotes exchange rate, meet the requirement of all
branches, maintain balance of nostro A/c and Net Open Position (NOP). Front Office
also maintain the regulatory obligation like Cash Reserve Ratio (CRR), Statutory Reserve
Ration (SLR).

 Treasury Mid Office: Mid Office is mainly for complying regulations, obligations,
monitoring and managing risk & report the same to the higher authority of the bank.

 Treasury Back Office: Back Office is for settlement and reconciliation of all deals Nostro
and Vostro A/C. It also manages discrepancies, disputes, re-valuations of foreign
exchange and reporting to senior management of the bank and regulatory authority.

2.2.3 Process Flow of Treasury:

A transaction normally starts with a dealer striking a transaction/deal in the market,

maintaining his/her own record for monitoring the exchange position. Within stipulated
time, dealer passes the deal slip to back office through the mid office. The mid office first
checks the deal slip and transfers the same to the back office. The back office, after
confirming arrangements with the counterparty, will pass the accounting entries/vouchers,
make the settlement, reconcile positions and inform the Head of Treasury of the accurate
position through the mid office. The back office runs valuations on a periodic basis and
checks the day-to-day treasury activities. Finally, front office reports the daily transaction
details to line management as per the prescribed format included in Appendix-I.

Page 13 of 110
 The process flow chart within a segregated functional structure is below:

FRONT OFFICE

Price
Deal Entry
Curve
New Product Yes

Trading, Approval
Contracts
No
Origination Deal
Structuring End Logistics Manage
ment

MIDDLE OFFICE
or RISK CONTROL
Validation Confirmation
Credit

Contract
Daily Risk Price Risk
Measurement

BACK OFFICE

Compliance /
Actualization Settlement Accounting Reconciliation
Disclosure

2.3 Clearance regarding availability of funds from the Treasury Division:

The Treasury Division is solely responsible for maintaining the liquidity position of ABL.
Every branches or divisions have to take necessary clearance in black and white from
the Treasury Division regarding availability of fund before sanctioning of any new
funded or non-funded facility to a customer as per following slabs:

Name of Currency Slab for Permission Slab for Requisition Minimum No. of WD
before have to inform
BDT 5.00 Crore & above 1.00 Crore & above 03 days
USD 5.00 lac & above 50,000.00 & above 03 days
Other FC & ACU$ 5.00 lac & above 10,000.00 & above 03 days

Page 14 of 110
2.4 Head of Treasury: Experience, responsibilities and reporting line:

The Head of Treasury must have at least 10 (ten) years of working experience in the
bank and minimum 05 years in different levels of Treasury related departments such as
Front office, Mid office or Back office. The Head of Treasury is the member secretary of
ALCOM. He places the balance sheet analysis, along with recommendations in the
ALCOM meeting. To avoid any conflict, contradiction and to take swift decision, the
head of treasury directly report to the Managing Director & CEO of the bank. The Head
of Treasury will not in charge of any credit related or others major divisions such as
RMD, ID, CAD etc.

Page 15 of 110
2.5 Organogram of Treasury:

Head of Treasury
(DGM/AGM)

Deputy Head of Deputy Head of

Treasury Treasury
(AGM/SPO) (AGM/SPO)

FX Chief Dealer MM Chief Dealer ALM Desk Investment &

(SPO/PO) (SPO/PO) In-charge Trading In-charge
(SPO/PO) (SPO/PO)

Cross Money ALCOM Fixed Income

Currency Market Officer Security
Dealer Dealer (PO/SO) Dealer
(PO/SO) (PO/SO) (PO/SO)
SLR CRR
Cross
Reporting
Currency
MM (SO/Officer) Quoted
Dealer
Security Shares
(PO/SO)
Dealer Dealer
(PO/SO) (PO/SO)
USD/BDT SLP
Dealer Reporting
(PO/SO) (SO/Officer)

Govt.
Reporting Securities
Officer LCR &
Corporate Biniyog
(SO/Officer) NSFR
Dealer Window
Reporting
(Need Based) (SO/Officer) (SPO/PO)
(PO/SO)

Reporting Demand
Officer Time Other
(SO/Officer) Reporting Investment
(SO/Officer) Dealer
(PO/SO)

Supporting Supporting Supporting Supporting

Staff Staff Staff Staff

Page 16 of 110
2.6 Operational Risk Management

2.6.1 Risk Limits

ABL set the following limits for front-office dealers and counterparties:

a) Dealing Limits: these refer to trigger points indicating transaction amounts,

positions and/or trading volumes for the front-office dealers. If necessary, Head of
Treasury may allow the dealers to make need-based deal beyond the limit. The
details of dealing limits are discussed in Chapter-11.

b) Counterparty Limits: these refer to the total amount of exposure that ABL prudently
maintain with other banks or financial institutions. The process for setting these
limits are discussed in Chapter-11.

2.6.2 Transaction Monitoring and Reporting

To monitor the transactions, outstanding position and profitability, Treasury
Division reports their daily activities to the line management. Through the ALM
desk, Treasury also report its activities on a periodic basis in accordance with
prescribed formats which are shown in Appendix-I. The ALM Desk maintains
updated record of movements in the balance sheet as these are impacted upon by
treasury transactions, and report the same to the ALCOM through the Managing
Director & CEO. The activities and performance of ALCOM have to inform to the
BoD at least once in a year.

2.6.3 After-Hours Dealing:

After-hours dealing refers to transactions initiated when the dealer’s own trading
room is scheduled to be closed. Locally, business hours are from 10.00 A.M. to 6:00
P.M and it may changes as per central bank's instruction or as per the requirement
of ABL.

2.6.4 Off-Premises Dealings:

A transaction done by a dealer who is not physically located in the dealing premises
(irrespective of the time of day) is referred to as an off- premises deal. This type of
deal needs to be treated separately from a deal done within the dealing room, as it
utilizes communication tools that are not as special as those of the dealing room.
For example, an off-premises deal done on the phone is generally not recorded and
thus there is no record in case of any future dispute. The back office is not in a
position to take immediate action (confirmation, settlement, etc.) in case of off-
premises deals.

Page 17 of 110
 Important Note for After Hour & Off Premises Dealing:
The current infrastructure of ABL does not support this kind of activity. Moreover, this
sort of dealing contains a high-level risk and should be avoided at all costs. For this
reason, the management of ABL has decided to discourage such activities. If situation
arises, after-hours dealings and off-premises dealings may be allowed with the approval
of management.

2.7 Mandatory leave:

Dealing is very sensitive and it involves different types of risk due to adverse or volatile
market movements. There is also risk of mistakes not being unearthed. Thus, all dealers
are required to be away from their desks by turn at a stretch for some days during a
given year. During this period, the dealer’s functions are to be run by other dealers and
he is not expected to be in contact with his treasury colleagues. This type of leave is
called Mandatory Leave. Management has decided to allow a leave period of 15 days in a
year for each dealer. Dealers are at liberty to avail of such leave at any time, upon
sanctioning by proper authority and adjustment of duty schedules. However,
management reserves the right to specify the mandatory leave roster in the interest of
ensuring appropriate controls on trading activities.

2.8 Internal Audit:

In view of the complexities of both trading and foreign exchange businesses, internal
audit is a significant activity that serves to review and check the adequacy of the key
control issues. This function should include:

 Checking for adherence to the various risk exposure limits

 Checking for compliance with internal & regulatory requirements
 Adequacy of statutory management

For additional safety, a concurrent audit process can be put in place by the mid and back
offices to ensure the day-to-day functioning is conducted in a safe manner. Each segment
of Treasury develops and maintain a Departmental Function Control Checklist (DCFCL) as a
guide for ensuring that all control activities are being effectively carried out.

2.9 Organization of ALCOM

As per Bangladesh Bank guidelines, ABL has a dedicated high-level committee to deal with
Asset Liability Risk Management, called the Asset Liability Management Committee
(ALCOM) comprising of the senior management of the bank to make important decisions
related to the Balance Sheet, Liquidity, Interest Rate, Foreign Exchange and Market Risk of
the bank.
The Asset-Liability Management Committee (ALCOM) guides the ALM process within the
parameters set forth by the BoD. As such, its outlook is holistic and long-term strategic and
its planning role is geared to achieving an optimum equilibrium between balance sheet
stability and yields. On the other hand, day-to-day treasury operations revolve around
tactical/short-term actions (mainly investments and trading) within the risk parameters
dictated by the ALCOM of ABL.

Page 18 of 110
2.10 Organizational structure of ALCOM:
The organizational structure of ALCOM of ABL is below:

Managing Dirctor
& CEO
(Chairperson)

Head of Head of Head of Head of CAD/ Head of

BS&UCD Treasury Credit CFO ID
(Member
Secretary)

Head of
Head of RMD
ALM desk

2.11 Key Roles and Responsibilities of the ALM Desk:

The ALM desk is responsible for day-to-day measure and mitigates the market risk and
liquidity risk of ABL. The broad responsibilities of the ALM desk are as follows:

 To oversee the growth and sustainability of assets and the liabilities

 To manage and oversee the overall activities of Financial Market
 To manage liquidity and market risk of the bank
 To understand the market dynamics such as competition, potential target
markets etc. for expansion of the business
 To provide inputs regarding market views and to suggest proper balance sheet
movement (expand or shrink) to cope with the changing situation in the market
or in the economy
 To arrange and keep records of ALCOM meetings
 To monitor the implementation status of the decision taken in ALCOM
meetings.

Page 19 of 110
 CHAPTER-03: THE ALCOM PROCESS

3.1. Constitution of the ALCOM:

The Managing Director & CEO of the bank is the chairperson and Head of Treasury is
the member secretary of ALCOM. The constitution of ALCOM is as follows:

 Managing Director & CEO

 Head of B&SUCD
 Head of Treasury
 Head of Credit
 Chief Financial Officer/Head of Central Account Division
 Head of International Division
 Head of Risk (RMD)
 Head of ALM Desk

More than this the Chairperson of ALCOM can invite any other related person
(maximum 2) in any meeting.

3.1.1 ALCOM Meeting:

The ALCOM of ABL generally meets at least once in every month to discuss various
aspects of ALM. The presence of all the members or their representative is mandatory
in every meeting.

3.1.2 Key Agenda of ALCOM meeting

The key agenda of ALCOM meetings is as below:

(i) Confirmation of minutes of previous ALCOM meeting

(ii) Review of actions taken in previous ALCOM and the implementation status
(iii) Review of monthly changes in various key parameters
(iv) Overall fund position including loanable funds, maintenance of CRR and SLR, LCR
and NSFR position, Structural Liquidity Profile etc.
(v) Asset position:
- Concentration
- Quality
(vi) Liability position:
- Deposit mix
- Market situation
- Concentration
- Cost of fund

Page 20 of 110
 (vii) Foreign exchange related asset and liability position:
- Forward agreement
- Net Foreign exchange liability
- OBU position: assets and liabilities
- SWAP position
- FX Term Placement position
- Import, Export and Remittance
(viii) Economic and Market Status and Outlook
(ix) Liquidity Risk related to the Balance Sheet
(x) Review of the price / interest rate structure:
- Interest rate risk in banking book
- Interest rate risk in trading book
- Equity price risk
(xi) Off-balance sheet position:
- Unused portion of lines of credit
- Acceptances
- Guarantees
- Maturity profile of other L/Cs
(xii) Capital Market Investment position: Solo and Consolidated basis.
(xiii) Investment in associates
(xiv) Leverage Ratio
(xv) Status of Deposit, Recovery, Import, Export, Remittance and Loan & Advances
(xvi) Treasury Performance Analysis
(xvii) Liquidity Position:
- Foreign Currency
- Local Currency
- Projected Cash Inflow & Cash Outflow
- Balance Sheet Analysis

3.1.3 ALCOM Paper:

ALCOM paper of ABL covering all the above issues presented in every meeting of ALCOM.
The Treasury Division is responsible to present the paper incorporating all necessary
information, analysis and suggestions from the related Divisions including own opinion (if
necessary) on the related issues. A separate observation from RMD regarding market and
liquidity risk also be included in the ALCOM paper. The decision taken against each issues
are carefully noted and preserved for at least 3 years.

Page 21 of 110
3.1.3.1 Contents of the ALCOM Paper:

The following are the key elements of ALCOM paper of ABL which need to ALCOM's
oversight on.

3.1.3.1.1 Confirmation of Minutes of last ALCOM meeting:

It is the formal confirmation of minutes of last ALCOM meeting.

3.1.3.1.2 Review of the action taken of the previous meetings:

It means detailed discussion on the progress on the action taken in the previous
meeting and review deadline if applicable.

3.1.3.1.3 Review of Economic and Market Status and Outlook:

This section starts with the review of key National & Global economic developments.
Specific reference to others countries' economy which is bearing impact on
Bangladesh's economy (export, import, remittance etc.) is important.

It also added on with an update of the local economy and interbank market. On
economic items, it must include GDP growth, Unemployment rate, Inflation, Credit
growth, Deposit growth, Govt. borrowing, export, import, remittance, FX Reserve,
current account balance and fuel & commodity price movement.

On market items, it must include movement of interbank market liquidity, call money
rates, term placement rates, Govt. securities yield and a comparison of interest rate
offered by comparable banks is important. The idea of this section is to identify the key
elements in the context of global and local economy and the impact likely to have on
the business of the bank in Bangladesh. ALCOM uses this information for making
decision and planning regarding the Agrani Bank's business.

3.1.3.1.4 Review of Balance Sheet and Liquidity Limits:

This part produces the analysis of balance sheet, structural balance sheet limits and
their utilization- AD ratio, Commitments, LCR, NSFR, Loan and Deposit Concentrations,
etc. It is important to observe the last few month's trends to get a better perspective.
Items which are not at acceptable levels are reviewed further in details and corrective
actions proposed. It also presents the short term liquidity management limits and their
utilization – Wholesale Borrowing Limits and Swapped Fund Limits etc.

3.1.3.1.5 Review of the Status of Regulatory Compliance:

This section lists the various regulatory liquidity requirements like as CRR, SLR, Net
Open Position Limit (NOP), Capital Adequacy Ratio etc. and compliance with those.

Page 22 of 110
3.1.3.1.6 Top 10 Depositors List:

This section lists the top 10 depositors of Agrani Bank Limited and their share of the total
deposits. The data examined at currency wise, tenor-wise, and the share of each of the
depositors as percentage of total deposits of the bank. The trend of the past few months
will give important perspective. Maturity bucketing for each of the depositors (call, 1 week,
1 month etc.) will be helpful. This helps the bank to have a greater visibility on where the
deposit concentrations are coming from. It is important to track the behavior of these
deposits and take measures so as to avoid any untoward liquidity issues.

3.1.3.1.7 Top 10 Borrowers List:

This section lists the top 10 borrowers of Agrani Bank Limited and looks using the same set
of parameters as for the top 10 depositors.

3.1.3.1.8 Capital Maintenance:

This section includes details and composition of the capital maintained by the bank in
relation to the minimum capital requirement as per regulatory obligation. It is used to
compare the future expected capital requirement due to forecasted asset growth. It is also
important to look at the return on Risk Weighted Assets of the bank . Again the trend of
the past few months give good perspective to understand how efficiently the bank is
deploying its capital.

3.1.3.1.9 Details of Loans and Deposits Movement:

This part will produce details of loan and deposits of ABL. It is segment-wise, product-wise
and currency-wise. AD ratio movements for the last few month also included in this
section.

3.1.3.1.10 Loans and Deposit Projections:

Monthly projections of loans and deposits of the bank for the next 3-6 month and whole
year are presented to ALCOM by the respective divisions. The information is used by
ALCOM to understand future liquidity requirements and strategies accordingly. In this
respect, it should be careful to review the historical projection accuracy to understand the
level of adjustments that can be qualitatively applied to the current projections. The
projections should be given both for Foreign Currency & Local Currency as this is more
meaningful. If necessary, ALCOM can also seek segment-wise projections in addition to
total loans deposit projections from the respective divisions.

3.1.3.1.11 Trend of Lending Rates and Deposit Rates:

This section includes the trend of the lending and deposit rates. Product-wise, segment
wise and currency-wise breakdown of the rates before ALCOM for review.

Page 23 of 110
3.1.4 Responsibility of related divisions:

All divisions are liable to provide necessary information, analysis and suggestions
regarding the issues related with them which are stated in Section 3.1.2 within a
stipulated time to the Treasury Division. The Treasury Division ensures that these are
incorporated in the ALCOM Paper.

3.2 Major Issues:

The following are the major issues regarding asset and liability management within the
scope of ALM policy of Agrani Bank Limited.

3.2.1 Market Risk:

The risk arising from market risk factors such as interest rates, foreign exchange rates,
equity prices and the roles and responsibilities of board and senior management of the
bank have been discussed in the Chapter-08. The ALCO of the Bank works out on various
limits [explicitly, maximum allowable funding gap to achieve desired level of NIM (Net
interest margin) and NII (Net interest income) maximum trading loss limit by a dealer,
daily loss limit in a portfolio (securities and equities), Stop Loss Limit, interbank
transaction limit] which must be approved by the board and ensure proper and effective
implementation of the same.

3.2.2 Liquidity Risk:

Liquidity risk arises from either the bank's inability to meet its obligations as they fall due
or to fund increases in assets without incurring unacceptable cost or losses. The Liquidity
Risk Management Policy included in Chapter-07 of the bank provided a detailed view
regarding the roles and responsibilities of board and senior management of the bank as
well as liquidity risk detection and mitigation techniques. Moreover, LCR and NSFR
recently introduced by Risk Management Division to cover a wider aspect of liquidity risk
detection and monitoring by the banks under stress situation. The ALCOM closely
monitor the developments around various liquidity issues in each and every meeting. The
effectiveness of the Contingency Funding Plan must be verified in the meetings. It is also
mandatory for the Treasury Department to inform the management regarding various
liquidity issues like as CRR, SLR, SLP, LCR, NSFR, ADR and IDR in every board/ALCOM
meeting of the bank.

Page 24 of 110
 Chapter-04: Wholesale Borrowing Guidelines (WBG)

4.1 Overview of Wholesale Borrowing Guidelines (WBG):

Wholesale Borrowing (WB) is the Bank’s historic market liquidity & borrowing capacity
from the inter-bank market. It indicates the dependence on wholesale markets for funding.
Sometimes bank raise fund from inter-bank market and ALCOM analyze and decide of its
optimum profitable use.

The bank’s capacity to borrow from the external wholesale market depends on:
 The size and turnover of the inter-bank market and market share
of the respective bank
 Counterparty limit imposed by the counter parts for the
respective bank

Moreover, the following factors are also considered for setting the wholesale borrowing
guidelines (WBG):
 Balance sheet size of the bank
 Historical trend of market liquidity
 Credit rating of the bank
 Stability of liquidity and interest rates of the market
 Others financial statement analysis

4.2 Products:

a) Local Currency: The following products are available in the inter-bank money market-
 Call Money
 Short Notice Deposit from banks and financial institutions
 Term Deposit (Less than 12 months)
 Commercial papers/similar instruments
 Govt. Securities
 Bangladesh Bank Bill
 Interbank Repo & Reverse Repo
 Bangladesh Bank Repo & Reverse Repo

b) Foreign Currency: The following products are available in the interbank FX market-
 Overdrawn Nostro-accounts (credit line)
 Term Deposit
 SWAP
 Overseas loan

Page 25 of 110
4.3 Counterparty for Wholesale Borrowing (WB):

ABL can borrow both local and foreign currencies from interbank local and FX market for
prudent management of liquidity. ABL also able to get credit, credit line and placement
from foreign banks.

4.4 Fund Concentration:

(i) Institutional concentration: As a State-Owned Commercial Bank, the main focus of

ABL for borrowing is the peer banks i.e., other State-Owned Commercial Banks
(SOCBs), Private Commercial Banks (PCBs), Foreign Commercial Banks (FCBs) and
Financial Institutions. The Islamic Banking Unit of ABL can borrow from Islamic banks
and Islamic unit of conventional bank’s as well.

(ii) Geographical concentration: For local currency, ABL try to borrow from local
commercial banks and financial institutions and for foreign currency it may borrow
from foreign banks.

4.5 Capacity:

The capacity of wholesale borrowing depends on the bank's current financial state and
eligible capital.

4.6 Wholesale Borrowing (WB) Limit:

Wholesale Borrowing covers call borrowing, Short Notice Deposit from banks and
financial institutions, placement received with maturity less than 12 months, commercial
papers/similar instruments and overdrawn Nostro-accounts or any kind of foreign
currency borrowing. As a Primary Dealer, WB Limit of ABL is capped at 100% of bank's
eligible capital on fortnightly average basis with maximum two deviations 110% of the
eligible capital in a particular fortnight as per Bangladesh Bank’s guidelines.
In 31/12/2020, Total Eligible Capital of ABL was Tk. 2,516.54 crore. On the basis of 100%
of eligible capital of the bank, the WB limit of ABL is Tk.2,516.54 crore which will change
as per the changes of eligible capital of the bank.

4.7 Scope of WB Limit:

The above limit is considered as an aggregate limit for ABL having dual businesses for
both conventional and Islamic banking operation.

Page 26 of 110
4.8 Roles & Responsibility of WB Manager:

Monitor the liquidity position of ABL and liquidity management activities undertaken by the
bank including wholesale funding activities. Head of Treasury is acting as the WB Manager.
The Money Market and FX Market dealers will analyze the liquidity position, historical
trend, demand and forecast future trend of the market and report to Head of Treasury.
Head of Treasury evaluate the report and make decision for borrowing within the limit.

4.9 Risk Involved with WB:

If the banks total lending and investment dominates on total deposit and equity, the bank
has to maintain liquidity by borrowing from the interbank market. In that case the
following risks are involved:

(i) Liquidity Risk: Liquidity risk is the risk that a bank may be unable to meet short term
financial demands. This usually occurs due to the inability to convert a
security or fixed asset to cash without a loss of capital and/or income in
the process.

(ii) Market Risk: Market risk is the risk of losses in positions arising from movements in
market prices.

(iii) Maturity Mismatch Risk: Maturity Mismatch risk arises when there is a mismatch
between the maturity of assets and liabilities of the bank.

For the prudent liquidity and treasury management, the WB manager have to follow the
WBG strictly. To keep intact the interest of ABL, the WB manager keep touch with the
market and take decision promptly as per situation demand.

Page 27 of 110
 CHAPTER-05: Contingency Funding Plan (CFP)

5.1 Overview of Contingency Funding Plan (CFP)

Contingency Funding Plan is a cash flow projection and comprehensive funding plan that
forecasts funding needs and funding sources at stress situation under market scenarios
including aggressive asset growth or rapid liability erosion. It is a set of policies and
procedures that serves as a blueprint for the bank to meet its funding needs in a timely
manner and at a reasonable cost. Such plan should be commensurate with the bank’s
complexity, risk exposure, activities, products, and organizational structure. In this sense,
a contingency funding plan is an extension of ongoing liquidity management and
formalizes the objectives of liquidity management by ensuring maintenance of an
appropriate amount of liquid assets, measurement & projection of funding requirements
during various scenarios and management of access to funding sources.

The main objective of CFP is to establish a framework for liquidity risk management
which ensure that ABL has sufficient liquidity resources to:
 Meet its regulatory obligations
 Meet the requests of depositors for withdrawal of their funds
 Repay loans to creditors in a timely manner
 Provide funding to customers who have firm commitments

Other objectives of CFP:

 To maintain liquidity at a prudent manner
 To reduce cash-consuming activities as much as possible
 To maintain confidence and
 To continue as a going concern

ALM Desk of Treasury anticipate all of the institutional funding and liquidity requirements
by:
 Analyzing and making quantitative projections of all significant on and off-balance
sheet fund flow and related effects
 Matching potential cash flow sources and uses of funds
 Establishing indicators

Page 28 of 110
5.2 Contingency Action Plan to Manage Stressed Liquidity

5.2.1 Scope
To establish a strategic action plan to manage a stressed liquidity situation in the market.
5.2.2 Purpose of the plan
To provide a framework within which an effective response to manage liquidity crisis
under stressed scenario.
5.2.3 Trigger point

Plan to be activated when 5 (Five) or more of the following conditions exist:

i. Bangladesh Bank has declined to open the Repo window at bank’s request
ii. Call money market rates have exceeded 10% for more than 15 consecutive days
iii. Call facilities have been declined by the market or a premium over market rates has
been imposed on ABL call borrowing
iv. Consolidated AD ratio has exceeded 70% for more than 15 days
v. Wholesale borrowing has exceeded eligible capital or Tk. 3,500.00 crore whichever
is greater
vi. FC Placement to OBUs & subsidiaries abroad reaches 75%
vii. The overall economy is experiencing tight liquidity position
viii. Low cost/no cost Deposit of ABL has fallen below 45% of Total Deposit Mix
ix. Percentage of net deposit withdrawal growth (12 month moving average) has been
2% or more for the last 3 consecutive months
x. Correspondent banks or other Banks/FIs decreased their credit line limit or call limit

5.3 Contingency Management Team (CMT)

5.3.1 CMT consists of all ALCOM members. Moreover, The MD & CEO may include any other
relevant personnel as deemed appropriate.
1. Managing Director & CEO (Chairman)
2. Deputy Managing Director(s)
3. GM, Credit
4. GM International Division
5. GM, Principal Branch
6. GM, Dhaka-1 &2 Circles
7. GMs of large corporate branches
8. Chief Finance Officer (CFO)
9. Chief Information Technology Officer (CITO)
10. Head of Treasury (Member Secretary)
11. Head of Risk Management Division (RMD)
12. Head of Islamic Banking Unit (IBU)
13. Head of Off-shore Banking Unit (OBU)

Page 29 of 110
5.3.2 Purpose of the Contingency Management Team

CMT of ABL works with the purpose to investigate causes and magnitudes of liquidity
crisis in stress scenario. The team also assesses steps to prevent escalation, understand
expected duration of the crisis and market sentiment. Finally, CMT take remedial
measures to mitigate the effects of the crisis.

The CMT of ABL works as following manner:

5.4 Phase-1: Impending Crisis

Details of Action Points ACTION TAKEN BY

Analyze the underlying cause about the crisis to Managing Director & CEO
establish:
- Extend and timing of the crisis
- Duration of the crisis
- Remedial action to prevent the crisis
Advise all Divisional Heads about the crisis and cancel
Managing Director & CEO
leave commitments of key personnel (if necessary)
Review liquid and market assets portfolio by maturity
Head of Treasury /CFO
and prepare a liquidation strategy
Liquidate any long FX positions and reduce FX open
Head of Treasury
position to a minimum level.

5.5 Phase-2: Crisis Situation

Details of Action Points ACTION TAKEN BY

Treasury will arrange special ALCOM meeting
immediately chaired by the MD & CEO in order to Head of Treasury
review and discuss the situation and its impact on
the Bank and assess how liquidity crisis can be
resolved.
Inform Bangladesh Bank about the crisis and
Managing Director & CEO
proposed remedial action.
Aware the Dealers about the crisis. Head of Treasury
Notify the crisis to Head of Circles, Corporate
Head of B&SUCD/Head of Treasury
Branches, Zones and Branch Managers

Page 30 of 110
5.6 Phase-3 Assessment & Action

Details of Action Points ACTION TAKEN BY

Confirm the liquid and marketable asset
Head of Treasury
portfolio for initial selective liquidation
Assess the level of interbank borrowing
capacity and raise funds to meet liquidity Head of Treasury
from the most reliable sources
Approach Bangladesh Bank for Repo/ special
Repo Head of Treasury

Not to approve early withdrawal of large

Head of Corporate Branches, Zonal Heads
deposits without prior approval
Assess overall loan portfolio and activate
effective plan to seek repayment from Head of Credit
customers
Submit reports on daily liquidity status of the
bank and changes therein to ALCOM meeting Head of Treasury
on regular basis
Communicate with major fund suppliers in an Head of Treasury/Corporate Branch
effort to assure continued availability Heads, Zonal Heads
Monitor large deposit accounts of corporate
Head of Treasury/Head of B&SUCD
and individuals
Selling FCY from FX open position limit to
Head of Treasury
generate LCY liquidity
Assess overall level of loans/OD and ensure no
incremental drawdown. Head of Treasury

Closely monitor withdrawal patterns and

report to Head of Treasury Dealers

Intensify deposit campaign Head of Corporate Branches/Zonal Heads

Securitization of assets if allowed by
regulators CFO/ Head of Treasury

Review deposit and lending rates Head of Treasury

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5.7 Critical Contact Information

Officials Direct Number Intercom PABX Cell Number

1. Managing Director & CEO 9585748, 9585749 102 301 01713480103
2. Deputy Managing Director-1 9551731 109 560 01713480177
3. Deputy Managing Director-2 9552476 122 303 01714758922
4. Deputy Managing Director-3 9569048,9563661 109 302 01708122215
5. Deputy Managing Director-4 9569377, 9585739 104 303 01708122212
6. GM, International Division 9556128, 9559591 139 491 01701204575
7. GM, CPCRMD 9563673, 9550959 113 544 01730714643
8. GM, CAD/CFO 9551647,9554041 601 673 01714410824
9. GM, Principal Branch 9551650, 9585843 135 396 01712756555
10. Head of Treasury 47120069 116 358 01913485007
11. Head of B&SUCD 9553922 - - 01755618203
12. Head of Risk 9563673, 9550959 113 544 01730714643
13. Head of Islamic Banking Unit 9514047 - 345 01712075021
14. Head of Off-shore Banking 113
9563673, 9550959 544 01730714643
Unit (OBU)
Central Bank
1. Governor 9530420, 9530411
2. Deputy Governor-1 9530424, 9530422
3. Deputy Governor-2 9530412
4. Deputy Governor-3 -
5. Deputy Governor-4 -
6. General Manager (BRPD) 9530252
7. General Manager (FEPD) 9530123
8. General Manager (DMD) 9530131
9. General Manager (DOS) 9530107, 9530093
10. General Manager (FRTMD) 9530116

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5.8 Summary of Regulations, Contingency Liquidity Sources and Funding Plan:

5.8.1 Regulations and Contingency Liquidity Sources:

Regulation Parameter/Formula Liquidity Sources
Cash Reserve Ratio (CRR)  Daily minimum 3.50% Cash Local currency at
 Bi-weekly minimum central bank
4.00%
Statutory Liquidity Ratio (SLR)  Minimum 13.00% for  Treasury Bills
Conventional Banking  Treasury Bonds
 Minimum 5.50% for  Cash in Tills
Islamic Banking  FCY balance with Central
Bank
 LCY balance with Central
Bank in excess of CRR
 Others Govt. approved
Securities

5.8.2 Money Market Instruments Comprising Marketable Securities and Reserve Liquidity:

Type of Tenor Marketable (M) Or

Instruments Reserve (R)
Treasury bills Issued by Central Bank weekly auction at Held to Maturity (HTM)-R
discount. Tenors are 91, 182, 364 days. Held for Trade (HFT)-M
Treasury Bond Issued by Central Bank weekly auction at Held to Maturity (HTM)-R
par. Tenors are 2, 5, 10, 15 and 20 years. Held for Trade (HFT)-M

5.8.3 Products for borrowing:

Type of Ledger Sources of Borrowing Type of Products

LCY Book Money Market  Call Money
 Short Term Placement
 SND from banks and financial
institutes
 Term Placement
 Interbank Repo/ Reverse Repo
Bangladesh Bank  Bangladesh Bank Repo
 Assured Liquidity Support (ALS)
 Special Repo
FCY Book FX Market  Term Deposit
 SWAP
 Utilization of surplus Nostro balances
 Overseas Loan
Bangladesh Bank  Overdraft (OD) facilities

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5.8.3.3 Reporting Format for Quantification of Contingency Funds:

A. Local Currency

Sources of contingency funds Estimated Maximum Funding Cost of

Available Funds ABL
Money Market
 Call Money
 Short Term Placement
 SND from banks and financial institutes
 Term Placement
 Interbank Repo/ Reverse Repo
Bangladesh Bank
 Bangladesh Bank Repo
 Assured Liquidity Support (ALS)
 Special Repo

B. Foreign Currency

Sources of contingency Basis of calculation Estimated Maximum Funding Cost of

funds Available Funds ABL
FX Market
 Term Deposit
 SWAP 1-month Libor
 Utilization of surplus +_________ spread
Nostro balances
 Overseas Loan
Bangladesh Bank
 Overdraft (OD)
facilities

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 CHAPTER-06: Management Action Trigger (MAT) Plan

6.1 Introduction:
Treasury functions focus the profit maximization approach by means of effective management
of assets and liabilities of the bank. In such a manner that enable bank to make the maximum
profits, maintain the proper and strong liquidity position and strengthen the fund management
activities. Liquidity is always the utmost priority for a bank to meet the day-to-day operations,
customer claims and other obligations and perform inter-bank transactions. Thus, asset liability
management functions, if performed properly and with utmost effectiveness, can ensure the
short and long-term resilience of the bank in terms of liquidity, profitability, risk management
and flawless operations.
Considering the effects of treasury functions particularly in the context of liquidity, solvency
and sustainability of the bank, setting of trigger points under different scenario (economic,
market condition and internal capability) for different indicators of treasury functions are
inevitable. In this connection, regulatory authority advises the bank to establish trigger points
for different indicators like- liquidity ratio, funding requirement, fund collection, deposit
mobilization, prudent management of balance sheet compositions etc. to ensure surveillance
and monitoring at the top including the board and senior management so that under no
circumstance bank face any unexpected liquidity crisis or other financial difficulties.
Management action triggers establishes a standard/benchmark/signal to alert management
about various potential and emerging pressures. Management action trigger plan is subjected
to review while the assumptions and the thresholds levels are regularly reviewed in response
to regulatory changes and changing business, financial, economic and market conditions.
6.2 Definition of Management Action Trigger (MAT):
MAT is an important management tool to identify certain indicators or triggers in order to
anticipate risk before it becomes an issue. A proactive method employed to both identify and
monitor various kinds of risk under any adverse situation. During this risk identification
process, triggers are identified and these triggers are tracked during the risk monitoring and
control process.
6.2.1 Goal of the plan:
The main goal of management action trigger is to maintain normal situation at any unpleasant
position. Early warning indicator was established as MAT. The MAT is a trigger level to warn the
concern authority of a persistently breach limit position and other adverse situation.

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 6.2.2 Scope of the Plan:
To establish management action trigger plan in order to manage any stressed situation in
the market policy changed by the central bank or other related factors. It has got a vast
area to apply for any adverse situation of the financial and economic market.
6.2.3 Purpose of the plan:
The purpose of management action trigger is to provide a framework within which an
effective response to any crisis, stressed or adverse situation of the bank Stressed situation
is defined as a condition that arises from a sudden deterioration of normal situation.
6.3 Points: While plan is applicable
Management Action Trigger Plan to be activated under the following conditions.
6.3.1 For Local Currency:
The following conditions are considered for local currency to apply Management Action
Trigger Plan.
6.3.1.1 Liquidity Purpose:
i) I) Bangladesh Bank has declined to open the Repo window at bank’s request and
interbank repo rate stands at 6% -7%.
ii) II) Call money market rates have exceeded7%-9% for more than 10 consecutive days.
iii) III) Counter Party have been declined or a premium over market rates has been imposed
on Agrani Bank Limited’s call Loan, REPO, REVERSE REPO, Term Deposit, Term Placement
or other type of borrowing.
iv) IV) Consolidated Advance Deposit Ratio has exceeded 70% for more than 03 month.
6.3.1.2 Wholesale Borrowing Purpose:
I) Wholesale borrowing has exceeded eligible capital or Tk. 3,200.00 crore which is
greater.
II) The overall economy is experiencing tight liquidity position for local currency.
III) Low cost/no cost deposit of Agrani Bank Limited has fallen below 40% of total deposit.
IV) Percentage of net deposit withdrawal growth (06 month moving average) has been
25% or more for the last 3 consecutive months.
V) Recent trend showing correspondent banks or other banks decreased their credit line
limit or call limit.
VI) Percentage in Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) falls
below respectively135% and103% for two consecutive reporting period.

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VII) Breach of Maximum Cumulative Outflow (MCO) limit in (At present 18.50%)
consecutive months/periods/times which is usually three months period and the yearly
average.
VIII) Significant gap of Asset Liability maturity (Negative or Positive Gap) if exists in the
maturity bucket of the Structural Liquidity Profile (SLP) in regular frequency.
IX) Leverage ratio if falls below 3% (As per BASEL III requirement) for three consecutive
reporting period and seems significant in comparison to credit growth.
X) Capital to Risk Weighted Asset Ratio (CRAR) falls below 10% (As per BASEL III
requirement) with a significant decrease in Common Equity Tier-1 (CET-1) capital.
XI) Excessive increase of “Off Balance Sheet” exposures and breach of limit set in risk
appetite of the bank.
6.3.2 For Foreign Currency:
The following conditions are considered for foreign currency to apply Management Action
Trigger (MAT) Plan.
I) For Sale with a Purchase (SWAP), Term Deposit and Term Placement have been declined by
the counter party or a premium over market rates has been imposed on Agrani Bank Limited’s
foreign currency borrowing.
II) The overall economy is experiencing tight liquidity position for foreign currency position.
III) Recent trend showing correspondent banks or other banks decreased their credit line limit
or other foreign currency transaction limit.
IV) The bank is unable to comply its inter-bank payment obligation, import payment, outward
remittance.
V) The bank breaches its Net Open Position (NOP) for consecutive 15 working days.
VI) The bank breaches its Sale with a Purchase (SWAP) funds limit for consecutive 15 working
days.
VII) The bank breaches its Wholesale Borrowing Guidelines (WBG) for consecutive 10 working
days.
6.3.3 Other Trigger Points:
6.3.3.1 Trigger Points for Liquidity Management: Trigger Point for A. WB (Wholesale
Borrowing):
I) Abnormal or significant growth of credit from interbank and increase of fund outflow
II) Decrease in the deposit growth abruptly with a significant decrease in low-cost deposits

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III) Excessive increase in off balance sheet items particularly in Import payment and outward
remittance.
IV) Decrease of inflows of fund in the form of interest earnings from different investment
instruments.
V) Stuck up of fund in long term investments.
VI) Increase of customer’s withdrawal by a significant amount and in percentage.
6.3.1.2 Trigger Points for CFP (Contingency Funding Plan):
I) Check Precautionary credit arrangement with other banks.
II) Regular review of market condition.
III) Prediction of immediate funding requirement based on business operations.
IV) Over reliance on few participants for fund collection in crisis moments.
V) Substantial increase particularly the negative gap in maturity mismatch in short term
buckets.
6.3.1.3 Trigger Point for Loss Minimization/Profit Maximization:
I) To quote market oriented competitive deposit and lending rate.
II) To discourage on borrowings from interbank market for both Local and foreign currency.
III) Discourage collection of costly deposits.
IV) Increase fee and commission-based income.
V) Accelerated Recovery against Non-Performing Assets (NPA), reduce NPA and prevent
further deterioration of NPL.
VI) To quote actual and perfect market-oriented interest rate for Loans, Advances and Lending.
VII) Increase of interest and non-interest income.
VIII) Increase of value-added services that generate profit.
IX) Innovate and marketing of special products with attractive rate so that it can contribute to
the profit
X) Investment in profitable instruments, securities to ensure risk free income.

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6.4 Management Action Trigger Team (MATT):
There is a Management Action Trigger Team (MATT) which mainly consist following members.
Moreover, the Managing Director & Chief Executive Officer (CEO) may include any other
relevant personnel as deemed appropriate.
Sl. Designation Position
01 Managing Director& CEO Chairman
02 Deputy Managing Directors Member
03 GM, Credit Policy & CRM Member
04 GM (ID and Treasury) Member
05 Chief Financial Officer (CFO) Member
06 GM, Risk Management Division Member
07 Head of Treasury Member Secretary

Under such circumstance, if bank traces any of this trigger as mentioned above or identifies
unfavorable conditions, the committee may sit within short notice for a meeting for resolving
the issues with utmost priority. Besides, the committee may form a team comprising head of
associated divisions to discuss, share and make decisions to meet up the adverse situation in
case of emergency. Moreover, if committee feel, it can request ALCO to arrange a special
meeting.
6.5 Conclusion:
This system of Management Action Trigger provides check and balance for keeping a close
watch of risk and its triggers. These triggers may also be termed as risk symptoms or early
warning signals, identified in the risk identification process needs to keep under close
observation. Once problem arises or critical factors are identified, they are scrutinized in the
risk monitoring and control process, thus adding a series of quality assurance and quality
control to risk management. This process is designed to set a control tool or mechanism in
monitoring phase to ensure a proactive measure prior to the happening of the risks, so that
bank can address the crucial issues effectively without any subsequent damages or losses. The
process is implemented in phases and executed at operational layer in concerned working
zones, at management layer led by the Chief Executive Officer and at the strategic layer by the
Board of Directors and the committees of the board.

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 CHAPTER-07: Liquidity Risk Management

7.1 Liquidity Risk

Liquidity is the capacity of a bank to increase in assets and meet both expected and
unexpected cash and collateral obligations at reasonable cost and without incurring
unacceptable losses. Liquidity risk is the inability of a bank to meet such obligations as they
become due, without adversely affecting the bank’s financial condition. Effective liquidity risk
management helps ensure a bank’s ability to meet its obligations as they fall due and reduces
the probability of an adverse situation developing.

7.2 Liquidity risk indicators

The following indicators that have potential to ignite liquidity risk for the bank:

a) A negative trend or significantly increased risk in any area or product line.

b) Concentrations in either assets or liabilities.
c) Deterioration in quality of credit portfolio.
d) A decline in earnings performance or projections.
e) Rapid asset growth funded by volatile large deposit.
f) A large size of off-balance sheet exposure.
g) Deteriorating third party evaluation about the bank and negative publicity.
h) Unwarranted competitive pricing that potentially stresses the banks.
ABL carefully monitor such indicators and exercise scrutiny wherever it deems appropriate.

7.3 Managing liquidity risk

Liquidity risk is managed through controlling concentrations and relative market sizes of
portfolios in the case of asset liquidity risk and securing credit lines or other back-up
funding through diversification and limiting cash flow gaps in the case of funding liquidity
risk. Liquidity risk management involves not only analyzing banks on and off-balance sheet
positions to forecast future cash flows but also how the funding requirement would be
met. Liquidity risk management procedures of ABL are comprehensive and holistic. It
covers the formulation of overall liquidity strategy, risk identification, measurement,
monitoring and control process.

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7.4 Board oversight

The effective liquidity risk management body of ABL includes BoD, Senior management,
personnel having relevant expertise and efficient systems and procedures.

The duty of board of directors is to understand the liquidity risk profile of the bank and the
tools used to manage liquidity risk. The board has to ensure that the bank has necessary
liquidity risk management framework and is capable of dealing with uneven liquidity
scenarios. The board approves the strategy and significant policies related to the
management of liquidity. The responsibilities of the board of directors are:

a) Providing guidance on the level of appetite for liquidity risk.

b) Appointing senior managers who have ability to manage liquidity risk and delegate to
them the required authority to accomplish the job.

c) Continuously monitoring the bank's performance and overall liquidity risk profile
through reviewing various reports.

d) To ensure that senior management takes the necessary steps to identify, measure,
monitor and control liquidity risk.

7.5 Senior management oversight

Senior management is responsible for the implementation of sound policies and

procedures keeping in view the strategic direction and risk appetite specified by the board.
To effectively oversee the daily and long-term management of liquidity risk, senior
management deals with:

a) Develop and implement procedures and practices that translate the board's goals,
objectives and risk appetite into operating standards that are well understood by bank
personnel and consistent with the board's intent.

b) Adhere to the lines of authority and responsibility that the board has approved for
managing liquidity risk.

c) Oversee the implementation and maintenance of management information and other

systems that identify, measure, monitor and control the bank's liquidity risk.

d) Develop and recommend liquidity and funding policies for approval by the board and
implement the liquidity and funding policies.

e) Develop lines of communication to ensure the timely, dissemination of the liquidity and
funding policies and procedures to all individuals involved in the liquidity risk
management process.

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 f) Ensure that liquidity is managed and controlled within the liquidity and funding
management programs.

g) Ensure the development and implementation of appropriate reporting systems with

respect to the content, format and frequency of information concerning the bank's
liquidity position in order to permit the effective analysis for the sound and prudent
management and control of existing and potential liquidity needs.

h) Projection of liquidity requirements.

i) Monitor economic and other operating conditions to forecast potential liquidity

needs.

j) Ensure that an internal inspection and audit function reviews and assesses the liquidity
management program.

k) Report comprehensively on the liquidity management program to the BoD at least once
a year.

7.6 Liquidity risk strategy

ABL has an agreed liquidity strategy for the day-to-day management of liquidity. This
strategy addresses the bank's goal of protecting financial strength and the ability to
withstand stressful events in the market place.

The liquidity risk strategy of ABL is defined by the board enunciate specific policies on
particular aspects of liquidity risk management as below:

a) Composition of assets and liabilities:

The strategy outlines the mix of assets and liabilities to maintain liquidity. Liquidity risk
management and asset-liability management have integrated to avoid high costs
associated with having to rapidly reconfigure the asset liability profile for maximum
profitability to increased liquidity.

b) Diversification and stability of liabilities:

The funding concentration exists when a single decision or a single factor has the potential
to result in a significant and sudden withdrawal of funds. As such situation may lead to an
increased risk. The board and senior management specify guidance relating to funding
sources and ensure that the bank has diversified sources of funding day-to-day liquidity
requirements. The bank is more resilient to tight market liquidity conditions when liabilities
were derived from more stable sources. To comprehensively analyze the stability of
liabilities or funding sources, the bank needs to identify:

i. Liabilities that stay with the bank under any circumstances.

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 ii. Liabilities that run-off gradually if problems arise.

i. Liabilities that run-off immediately at the first sign of problems.

ABL has explicit and prudent policies that ensure funding is not unduly concentrated with
respect to:

i. Individual depositor.

ii. Type of deposit instrument.

iii. Market source of deposit.

iv. Term to maturity.

v. Currency of deposit since bank has liabilities both on and off-balance sheet in foreign
currencies.

c) Managing liquidity in different currencies:

The bank has a strategy on how to manage liquidity in different currencies. Normally limits
are set in equivalent US dollar. A dealer can take position in any currency.

d) Dealing with liquidity disruptions: ABL has a strategy on how to deal with the potential for
both temporary and long-term liquidity disruptions. The interbank market can be
important source of liquidity. However, the strategy should take into account the fact that
in crisis situations access to interbank market could be difficult as well as costly. The bank's
liquidity strategy must be documented in the liquidity policies and communicated
throughout the bank. The strategy also evaluated periodically to ensure that it remains
valid.

7.7 Liquidity Policies:

For sound and prudent liquidity policies ABL set out the sources and amount of liquidity
required to ensure that the liquidity is adequate for the continuation of operations and to
meet all applicable regulatory requirements. The liquidity policy supported by effective
procedures to measure, achieve and maintain liquidity. Operating liquidity is the level of
liquidity required to meet a bank's day-to-day cash outflow commitments. Factors
influencing ABL's operating liquidity include:

i. Cash flows and the extent to which expected cash flows from maturing assets and
liabilities.

ii. The diversity, reliability and stability of funding sources, the ability to renew or replace
deposits and the capacity to borrow. For regulatory purposes a bank is required to hold
a specific amount of assets classed as "liquid", based on its liabilities. In assessing the
adequacy of liquidity, ABL accurately and frequently measure:

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 a) The maturity profile of current and approaching cash flows generated by assets and
liabilities, both on- and off-balance sheet.
b) The extent to which potential cash outflows are supported by cash inflows over a
specified period of time, maturing or liquefiable assets and cash on hand.
c) The extent to which potential cash outflows may be supported by the bank's ability
to borrow or to access discretionary funding sources
d) The level of statutory liquidity and reserves required and to be maintained.

ABL formulated liquidity risk management policy which are recommended by senior
management/ ALCOM and approved by the BoD. ABL has specific liquidity risk management
policy which include:

i. Statement of liquidity risk appetite

ii. General liquidity strategy of short and long-term liquidity risk management and process
for strategy formulation.

iii. Roles and responsibilities of individuals performing liquidity risk management

functions, including structural balance sheet management, pricing, marketing,
contingency planning, management reporting, lines of authority and responsibility for
liquidity decisions

iv. Liquidity risk management structure for monitoring, reporting and reviewing liquidity

v. Liquidity risk management tools for identifying, measuring, monitoring and controlling
liquidity risk including the types of liquidity limits and ratios in place and rationale for
establishing limits and ratios.

vi. Mechanisms for dealing with deviations from the policy and the imposed restrictions.

vii. Contingency Funding Plan (CFP) for handling liquidity in crises scenario.

The liquidity policy of ABL is communicative with the down line throughout the bank. The
board and senior management of ABL ensure that policies are reviewed at least annually
on a regular basis. When there are any material changes in the bank’s current and
prospective liquidity risk profile. This changes stem from internal circumstances like
changes in business focus or external circumstances like changes in economic conditions.

Reviews provide the opportunity to fine-tune the bank’s liquidity policies in light of the
bank's liquidity management experience and development of business. Any significant or
frequent exception to the policy is an important barometer to gauge its effectiveness and
any potential impact on bank's liquidity risk profile.

7.8 Procedures and limits

In liquidity management, Treasury of ABL presents the business plan that include the
request for liquidity limits from the ALCOM for final approval and ratification by the Board
of Directors at least annually.

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 To effectively manage liquidity risk, it is imperative to understand the internal and external
risk drivers which are discussed below:

a) Factors Responsible for Increase/Decrease in Liquidity Risks

The quantum of liquidity of ABL attributed to a number of factors which are enumerated as
follows:

Liquidity Risks increase Liquidity Risks decrease

Growth of deposits Withdrawal of deposits
Receipt of bills receivable Payment of bills payable
Issuance of Bank Drafts, TT, MT Increase in Loan, Cash Credit, Overdraft Bill
purchased/discounted
Receipt of interest in Cash Acquisition of fixed assets
Repayment of Loan, Cash Credit, Overdraft Payment of salaries and other expenses in
etc cash
Investment of Capital Payment of Interest and borrowings
Sale of Investments Increase in investments

Key elements of an effective risk management process include an efficient MIS to measure,
monitor and control existing as well as future liquidity risks and reporting them to senior
management and the Board of directors.

7.9 Liquidity management structure

To manage the overall liquidity of the bank, ABL delegated to a specific, identified group
within the bank in the form of an Asset Liability Committee (ALCOM). Since liquidity
management is a technical job requiring specialized knowledge and expertise, Responsible
officers not only have relevant expertise but also have a good understanding of the nature
and level of liquidity risk assumed by the bank and the means to manage that risk. There is
a close links between those individuals responsible for liquidity and those monitoring
market conditions as well as other individuals with access to critical information.

7.10 Liquidity risk management process

The liquidity risk management process of ABL includes systems to identify, measure,
monitor and control its liquidity exposures. Management is able to accurately identify and
quantify the primary sources of the bank’s liquidity risk in a timely manner. Key elements of
risk management process include an efficient MIS to measure, monitor and control existing
as well as future liquidity risks and reporting them to senior management and the board of
directors.

7.11 Management Information System (MIS)

For the sound liquidity risk management decisions ABL enacted an effective Management
Information System (MIS). To collect and analyze the required data from the respective
sources to report the appropriate authority for review of liquidity risk. Information is
readily available for day-to-day liquidity management and risk control, as well as during
times of stress. Data should be appropriately consolidated and available in a timely
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 manner. The regular reports of ABL generates to monitor liquidity risk during crisis
scenario. Managers simply have to prepare the reports more frequently and keep
monitoring the crisis in mind when developing liquidity MIS. Besides other types of
information important for managing day-to-day activities and understanding the bank's
inherent liquidity risk profile which includes:

a) Asset quality and its trends to be prepared by NPAMD on monthly basis.

b) Earnings projections to be reflected in cash flow statement on monthly basis.

c) Report regarding the general reputation of ABL in the market and the condition of the
market itself to be prepared by Treasury Division on monthly basis.

d) The type and composition of the overall balance sheet structure to be prepared by
Central Accounts Division on periodically.

e) The type of new deposits being obtained, as well as its source, maturity, and price to be
collected, processed and reported by B&SUCD & PCMD.

f) Daily Liquidity Position, Interbank Lending/Borrowing Position, Foreign Currency

trading position to be reported to the Management at prescribed form. Besides that
interest sensitive deposit, deposit mixture, market scenario, balance sheet analysis and
other reported information to be informed periodically.

g) ALCOM submit liquidity position of the bank in every board meeting.

h) Overall activities of ALCOM reported to the BoD at least annually.

As far as information system is concerned, various units of ABL related to treasury

activities, the dealing, the treasury operation and risk management department is related.
Furthermore, management should ensure proper and timely flow of information among
front office, middle office and back office in an integrated manner. However, reporting
lines kept separate to ensure independence of these functions.

7.12 Periodic reviews

ABL conducts periodic reviews to determine whether the bank complies with its liquidity
risk policies and procedures. Positions that exceed prescribed limits, receive prompt
attention of appropriate management and resolved according to the process described in
approved policies. Periodic reviews of the liquidity management process also address any
significant changes in the nature of instruments acquired, limits and internal controls that
have occurred since the last review.

7.13 Measurement of liquidity risk

Effective liquidity risk measurement system helps in managing liquidity in times of crisis
and also optimizes return through efficient utilization of available funds. ABL is developing
a system that enables to capture liquidity risk ahead of time, so that appropriate remedial
measures could be prompted to avoid any significant losses.

The liquidity measurement of ABL involves assessing all the cash inflows against its
outflows to identify the potential for any net shortfalls going forward. This calculation
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 includes funding requirements for off-balance sheet commitments. A core measurement
tool of liquidity is the Maximum Cumulative Outflow (MCO), which estimates the amount
of prospective funding that the Bank will require at pre-specified future dates in normal
operating environments. This monetary amount is a measure of the liquidity gap between
the maturing liabilities and assets at specified time periods.

The measurement of the net funding requirements of ABL requires qualitative

assessments. Some cash flows are easily calculated or predicted, but liquidity managers
must also make assumptions about future liquidity needs, both in the very short-term and
over longer time periods.

The financial condition of the bank in relation to regulatory requirements and performance
relative to business plans and budgets focusing on the components of the balance sheet
and P&L statements that influence key operational parameters such as deposits, cost of
funds, interest margins, administrative costs, capital outlays etc. The information systems
of the bank have to developed to ensure timeliness and reliability of all data presented to
the ALCOM with a designated officer/desk which will ensure orderly collation and
appropriate analysis of all material presented to the body.

In the arena of measuring liquidity risk ABL is making assumptions about future funding
needs. While certain cash inflows and outflows can be easily calculated or predicted, banks
must also make assumptions about future liquidity needs, both in the very short-term and
for longer time periods. The bank's reputation plays in its ability to access funds readily and
at reasonable terms. Some commonly used liquidity measurement and monitoring
techniques that are adopted by the bank are:

7.14 Maturity Ladder:

ABL utilizes flow measures to determine its cash position. Maturity ladder estimates the
bank's cash inflows and outflows and thus net deficit or surplus (GAP) both on a day-to-day
basis and over a series of specified time periods. Banks need to focus on the maturity of its
assets and liabilities in different tenors. Mismatch is accompanied by liquidity risk and
excessive longer tenor lending against shorter-term borrowing can put a bank's balance
sheet in a very critical and risky position. To address this risk and to make sure bank does
not expose itself in excessive mismatch, a bucket-wise (e.g. call, 2-7 days, 8 days-1 month,
1-3 months, 3-12 months, 1-5 years, over 5 years) maturity profile of the assets and
liabilities to prepare to understand mismatch in every bucket. Further, such an analysis for
distant periods will maximize the opportunity for the bank to manage the gap well in
advance before it crystallizes. While making an estimate of cash flows, ABL considers the
following aspects:

a) The funding requirement arising out of off-balance sheet commitments needs to be

accounted for

b) Many cash flows associated with various products are influenced by interest rates or
customer behavior. Banks need to take into account behavioral aspects along with
contractual maturity. In this respect past experiences could give important guidance to
make any assumption

c) Some cash flows may be seasonal or cyclical

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 d) Management also consider increases or decreases in liquidity that typically occur
during various phases of an economic cycle.

ABL has to maintain sufficient liquidity to meet fluctuations in loans and deposits. As a
safety measure ABL also maintains a margin of excess liquidity. To ensure that this level of
liquidity is maintained, management estimate liquidity needs in a variety of scenarios.

7.15 Liquidity ratios and limits

ABL uses a variety of ratios to quantify liquidity. These ratios can also be used to create
limits for liquidity management. Ratios always used in conjunction with more qualitative
information about borrowing capacity such as the likelihood of increased requests for early
withdrawals, decreases in credit lines, decreases in transaction size or shortening of term
funds available to the bank. To the extent that any asset-liability management decisions are
based on financial ratios, bank's asset-liability managers understand how a ratio is
constructed, the range of alternative information that can be placed in the numerator or
denominator and the scope of conclusions that can be drawn from ratios and limits those
are:
a) Cash flow ratios and limits: One of the most serious sources of liquidity risk comes from
a bank's failure to "roll over" a maturing liability. Cash flow ratios and limits attempt to
measure and control the volume of liabilities maturing during a specified period of
time. Banks earn money from mismatches, i.e., by borrowing short term and lending
long term. ABL has to find out the right combination for longer term mismatch. The
Medium-Term Funding (MTF) ratio is based on the amount of liabilities with a
contractual maturity of more than one year to assets with a contractual maturity of
more than one year.
b) Liability concentration ratios and limits: Liability concentration ratios and limits help the
bank to prevent from relying on too few providers or funding sources. Limits are usually
expressed either as a percentage of liquid assets or absolute amount. Sometimes they
are more indirectly expressed as a percentage of deposits, purchased funds or total
liabilities.
c) Other balance sheet ratios:
ABL uses the following ratios to monitor current and potential funding levels are:
i. Total credit to total deposits
ii. Liquid assets to total deposits
iii. Short-term borrowing to liquid assets
iv. Borrowed funds to total assets
v. Composition of Liquid assets.

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7.16 Foreign currency liquidity management

ABL has a measurement, monitoring and control system for its liquidity positions in the
major foreign currencies in which it is active. To assess its aggregate foreign currency
liquidity needs and the acceptable mismatch in combination with its domestic currency
commitments, ABL also conducts separate analysis of its strategy for each currency
individually.

7.17 Internal controls

ABL has adequate internal controls to ensure the integrity of its liquidity risk management
process. This internal control is an integral part of the bank's overall system. The bank
promotes effective and efficient operations, reliable financial and regulatory reporting and
compliance with relevant laws, regulations and internal policies. The effective system of
internal control of ABL for liquidity risk management is:

a) A strong controlled environment

b) An adequate process for identifying and evaluating liquidity risk
c) To establish of control activities such as policies and procedures
d) Adequate information systems
e) Continuous review of adherence to established policies and procedures

With regard to control policies and procedures, attention is given to appropriate approval
processes, limits, reviews and other mechanisms designed to provide a reasonable
assurance that the bank's liquidity risk management objectives are achieved. Many
attributes of a sound risk management process, including risk measurement, monitoring
and control functions are key aspects of an effective system of internal control. ABL
ensures that all aspects of the internal control system are effective including those aspects
that are not directly part of the risk management process.

7.18 Monitoring and reporting risk exposures

Senior management and the BoD or a committee thereof, ABL receive reports on the level
and trend of the bank's liquidity risk at least quarterly. From these reports, senior
management and the BoD understand how much liquidity risk is assuming, whether
management is complying with risk limits and strategies are consistent with the BoDs
expressed risk appetite.

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 CHAPTER-08: Market Risk Management

8.1 Overview of Market Risk

Market risk is the risk of losses in positions of banking book arising from movements in
market prices. The most common types of market risk are:
 Interest rates risk
 Equity risk
 Foreign exchange risk
 Commodity risk
 Holding period risk

Agrani Bank exposed to market risk in a variety of ways as below:

a) Market risk explicated in portfolios of securities, equities and other instruments that
are actively traded.
b) Market risk implicated such as interest rate risk due to mismatch of assets and
liabilities.
c) Market risk may arise from activities categorized as off-balance sheet items.

The risk arising from market risk is as below:

8.2 Interest rate risk

Interest rate risk is the potential impact on bank’s net asset values due to changes in
market interest rates. Interest rate risk arises when a bank's principal and interest cash
flows (including final maturities), both on- and off-balance sheet, have mismatched re-
pricing dates. The amount at risk is a function of the magnitude and direction of interest
rate changes and the size and maturity structure of the mismatch position.

8.2.1 Effects of interest rate risk

In short run, the impact of changes in interest rates is on the bank's net interest income.
On the other hand, long term impact is on the bank's net worth since the economic value
of bank's assets, liabilities and off-balance sheet exposures are affected.
There are two common perspectives for the assessment of interest rate risk.

a) Earning perspective: In the earning perspective, the focus of analysis is the impact of
variation in interest rates on accrual or reported earnings. This is a traditional approach
to interest rate risk assessment and obtained by measuring the changes in the Net
Interest Income (NII), the difference between the total interest income and the total
interest expense or Net Interest Margin (NIM).

b) Economic value perspective: Variations in interest rates can also affect the economic
value of the bank's assets, liabilities and off-balance sheet exposures. The economic
value of the bank can be viewed as the present value of the bank's expected net cash
flow. Net Cash Flow can be calculated as-
Net Cash Flow = Expected cash flows on assets - Expected cash flows on liabilities +
Expected net cash flows on off-balance sheet exposures.
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 ABL also considers that past interest rates have some impact on future performance. In
particular, products & instruments that are not marked to market may already contain
embedded gains or losses due to past rate movements. These gains or losses must be
reflected over time in the bank's earnings.

8.2.2 Sources of interest rate risks

The sources of interest rate risk are:

a) Re-pricing risk: This risk arises from the timing differences in the maturity (for
fixed-rate) and re-pricing (for floating-rate) of the bank assets, liabilities, and off-
balance sheet positions. Usually, ABL funded in long term credit with short term
deposit. So, there have a chance of interest rate risk due to increase of deposit
rate in the market. It may cause declines in both the future income arising from
the position and its underlying value if interest rates increase. These declines arise
because the cash flows on the credit are fixed over its lifetime, while the interest
paid on the funding is variable and increases after the short-term deposit matures.

b) Yield curve risk: Yield curve risk arises when unanticipated shifts of the yield curve
have adverse effects on the bank's income or underlying economic value. The
underlying economic value of a long position in 10-year Treasury bond hedged by
a short position in 5-year Treasury bond could decline sharply if the yield curve
steepens, even if the position is hedged against parallel movements in the yield
curve.

c) Basis risk: Basis risk arises from the changing rate relationships among different
yield curves affecting the bank activities. It arises from imperfect correlation in the
adjustment of the rates earned and paid on different instruments with otherwise
similar re-pricing characteristics. When interest rates change, these differences
can give rise to unexpected changes in the cash flows and earnings spread
between assets, liabilities and off-balance sheet instruments of similar maturities
or re-pricing frequencies.

d) Optionality: An additional and increasingly important source of interest rate risk

arises from the options embedded in many bank assets, liabilities, and off-balance
sheet portfolios. Formally, an option provides the holder the right, but not the
obligation, to buy, sell, or in some manner alter the cash flow of an instrument or
financial contract. Options may be stand-alone instruments such as exchange-
traded options and over-the-counter (OTC) contracts, or they may be embedded
within otherwise standard instruments. While banks use exchange-traded and OTC
options in both trading and non-trading accounts, instruments with embedded
options are generally more important in non-trading activities.

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8.2.3 Effective Interest rate risk management practices

Effective interest rate risk management involves the application of following basic
elements in the management of assets, liabilities, and off-balance sheet instruments that
ABL maintains:

a) Appropriate board and senior management oversight

b) Adequate risk management policies and procedures
c) Appropriate risk measurement, monitoring, and control functions
d) Comprehensive internal controls and independent audits

8.2.4 Measurement of interest rate risk

Managing interest rate risk requires a clear understanding of the amount at risk and the
impact of changes in interest rates on this risk position. To make these determinations, ABL
gather sufficient information readily to permit appropriate action to be taken within
acceptable, often very shortest possible time. It takes the bank to eliminate or reverse an
unwanted exposure, the greater the possibility of loss. ABL uses risk measurement
techniques that accurately and frequently measure the impact of potential interest rate
changes on the bank. In choosing appropriate rate scenarios to measure the effect of rate
changes, bank consider the potential volatility of rates and the time period within which
the bank could realistically react to close the position.

8.2.4.1 Maturity & Re-pricing schedules

Techniques for measuring the bank's interest rate risk exposure begin with a maturity and
re-pricing schedule that distributes interest-sensitive assets, liabilities and off-balance
sheet positions into a certain number of predefined time bands according to their maturity
for fixed-rated instruments or time remaining to their next re-pricing for floating-rated
instruments. Those liabilities lacking definitive re-pricing intervals such as demand deposits
or savings accounts are assigned to re-pricing time bands according to the judgment and
past experience of the bank.

i) Gap analysis

Simple maturity and re-pricing schedules are used to generate simple indicators of the
interest rate risk sensitivity of both earnings and economic value to changing interest rates.
When this approach is used to assess the interest rate risk of current earnings, it is typically
called as gap analysis.

To evaluate earnings exposure, Interest Rate Sensitive Liabilities (ISL) in each time band are
subtracted from the corresponding Interest Rate Sensitive Assets (ISA) to produce a re-
pricing "gap" for that time band.

Negative or Liability-Sensitive gap occurs when interest-bearing liabilities exceed interest-

earning assets (including OBU positions) in a given time band, that is more interest-bearing
liabilities re-price than interest-earning assets. This gap implies that an increase in market

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 interest rates could cause a decline in net interest income. In this situation, a decrease in
interest rates should improve the net interest rate spread in the short term, as deposits are
rolled over at lower rates before the corresponding assets. An increase in interest rates
lowers earnings by narrowing or eliminating the interest spread.

Conversely, a positive or Asset-Sensitive gap occurs when interest-earning assets exceed

interest-bearing liabilities (including OBS positions) in a given time band, that is, more
interest earning assets re-prices than interest-bearing liabilities. The theory is:

Relative Interest Sensitive GAP = Interest Sensitive GAP/Bank’s Total Asset

Also, an ISA to ISL ratio of bank for particular time band could be a useful estimation of a
bank's position. The theory is:

Interest Sensitive Ratio = ISA/ISL

ii) Measuring risk to Net Interest Income (NII)

Gap analysis provide an estimate of changes in bank's net interest income with the changes
in interest rates. The gap for particular time band multiplied by a hypothetical change in
interest rate to obtain an approximate change in Net Interest Income (NII). The formula to
translate gaps into the amount of net interest income at risk, measuring exposure over
several periods is:

NII = i X Periodic Gap X Maturity Bucket

Where,
NII = Change in net interest income

i = Change in interest rate

Periodic Gap = (RSA-RSL)

Maturity Buckets = 1 day, 2-7 days, 8 days to 1 month, 1-3 months, 3-12 months, 1-5 years,
and 5+ years.

The gap reports are essential for prudent management of interest rate risk to indicate how
much net interest income is at risk and the timing of the risk. Gap analysis has a number of
shortcomings is as below:

a) Gap analysis provides an objective measure of risk associated with current positions
only. It does not incorporate future growth or changes in the mix of business.
b) Gap analysis does not capture basis risk or investment risk. It generally based on
parallel shifts in the yield curve.
c) Gap analysis does not take account of variation in the characteristics of different
positions within a time band.

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 d) Gap analysis does not account for the time value of money.
e) Gap does not take into account any changes in the timing of payments that might occur
as a result of changes in the interest rate environment.
f) Most gap analyses fail to capture variability in non-interest revenue and expenses
which is potentially an important source of risk to current income.

iii) Duration analysis:

Duration is the time-weighted average maturity of the present value of the cash flows from
assets, liabilities and off-balance sheet items. It measures the relative sensitivity of the
value of these instruments to changing interest rates and therefore reflects how changes in
interest rates will affect the bank's economic value or the present value of equity.

In this context, the maturity of an investment is used to provide an indication of interest

rate risk. The longer the term to maturity of an investment and the smaller the payments
that occur before maturity, the higher the duration. Higher duration implies that a given
change in the level of interest rates will have a larger impact on economic value.

Duration-based weights can be used in combination with a maturity or re-pricing schedule

to provide a rough approximation of the change in a bank's economic value that could
occur by a particular set of changes in market interest rates.

Properties of duration

Duration exhibits the following characteristics:

a) As maturity increases, duration increases and the bond's price becomes more sensitive
to interest rate changes

b) For two instruments with the same maturity, a high-coupon instrument will have a
lower duration than a low-coupon instrument which will be less price-sensitive. A larger
portion of a high coupon cash flow will be received sooner and thus the average time
to receipt of the cash flows will be less

c) A given fixed income instrument will have a higher duration in a low interest rate
environment than in a high interest rate environment

d) Duration may be positive or negative. A fixed rate instrument would have a positive
duration and an increase in interest rates would generally decrease the market value of
the instrument. Mortgage servicing rights and interest only (IO) mortgage-backed
securities generally have a negative duration since an increase in interest rates would
decrease the prepayment speed of the underlying mortgages, increasing the market
value of the instruments
e) Durations are additive when weighted by the amount of the contract

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Duration of equity
The duration of equity is derived from the duration of all assets, liabilities, and off-balance-
sheet contracts.

To understand how the duration of equity measures risk, the economic value of portfolio
equity viewed as a net bond position. Assets are analogous to long bond positions with
positive durations and liabilities are analogous to short bond positions with negative
durations. Duration indicates whether the economic value of the net bond position or
portfolio equity will increase or decrease with a change in rates.

Modified duration

Modified duration is standard duration divided by 1 + r, where r is the level of current

market interest rates. It reflects the percentage changes in the economic value of the
instrument for a given percentage change in 1 + r. As with simple duration, it assumes a
linear relationship between percentage changes in value and percentage changes in
interest rates.

Effective duration

Effective duration also called option-adjusted duration further refines the modified
duration calculation and is particularly useful when a portfolio contains callable securities.
Effective duration is derived by using simulation techniques to calculate the changes in
price of an instrument for a given changes in interest rates. Duration incorporates a bond's
yield, coupon, final maturity and call features into one number that indicates how price-
sensitive a bond or portfolio is to change in interest rates. For assets with variable cash
flow, it is appropriate to calculate the effective duration rather than the modified duration.

Duration of single instrument

To measure the duration of a single instrument, the bank has to calculate the weighted
average of each cash flow at time by the following formula:

CFt (1+y)t
Wt =
Bond price

These weighted averages are then summed to get duration by using the following formula:

T
Duration= Σt × Wt
t=1
Here,
Wt = Weighted average of cash flow at time t
CFt = Cash flow at time t
Y = Yield to maturity
T = Number of cash flow periods

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Duration of a portfolio of instruments

The duration of a portfolio of assets or liabilities is the market value of weighted average of
the individual duration of each asset or liability on the bank's balance sheet. Banks can
estimate the duration of a portfolio of contracts by weighting the durations of the
individual contracts and summing them.
The calculation of duration depends on three factors:

a) The final maturity of the financial instruments

b) The size and timing of cash flow (coupon payments)
c) The yield to maturity (YTM)

Measuring duration gap

To measure duration gap and the impact of net changes in the market value of equity, the
bank should:

a) Estimate the market value of each on-balance sheet rate sensitive assets and liabilities
of the bank to arrive at market value of equity
b) Calculate the durations of each asset and liability of the on-balance sheet portfolio
arrive at the aggregate weighted average duration of assets and liabilities
c) Calculate the duration GAP by subtracting aggregate duration of liabilities from that of
assets
d) Estimate the changes in the economic value of equity due to change in interest rates
on balance sheet positions based on the three interest rate changes i.e., 1%, 2%, and
3%
e) Calculate surplus/deficit on off-balance sheet items under the assumption of three
different interest rate changes i.e., 1%, 2%, and 3%
f) Estimate the impact of net change, both for on-balance sheet and off-balance sheet, in
the market value of equity.
Formula:
n

Weighted average duration of assets, (DA) =Σ WA X DA

i=1

n
Weighted average duration of Liabilities, (LA) =Σ WL X DL
i=1

Duration gap: DGAP = DA – MVL DL

MVA
i MV L
MVE = (−DGAP) X X X Total Assets
(1+y) MVA
Where,
y = YTM
Total Assets = Market value of total assets

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iv) Simulation Models

Simulation models are sophisticated and valuable complement to gap and duration
analysis. It is usually used to measure interest rate risk by estimating what effect changes in
interest rates, business strategies, and other factors will have on net interest income, net
income and interest rate risk positions. Simulation models can also be used to calculate the
present value and durations of assets and liabilities. There are two approach of simulation
model:

(i) Static simulations approach: the cash flows arising solely from the bank's current on-
balance sheet and off-balance sheet positions are assessed.

(ii) Dynamic simulation approach: the simulation builds in more detailed assumptions about
the future course of interest rates and expected changes in the bank's business activity
over that time.

The forecasts of simulation models are based on the following assumptions:

a) Future levels and directional changes of interest rates
b) The slope of the yield curve and the relationship between the various indices that the
bank uses to price credits and deposit
c) Pricing strategies for assets and liabilities as they mature
d) The growth, volume and mix of future business

6.2.5 Interest rate risk management program

ABL consider the significant factors in managing interest rate risk such as the frequency,
volatility and direction of rate changes, the slope of the interest rate yield curve, the size of
the interest-sensitive position and the basis for re-pricing at rollover dates. The bank will
follow a comprehensive interest rate risk management program by:

a) Establishing and implementing sound and prudent interest rate risk policies
b) Developing and implementing appropriate interest rate risk measurement techniques
c) Developing and implementing effective interest rate risk management and control
procedures

8.2.6 Interest rate risk management policies

For sound and prudent interest rate risk management, ABL has established a policy which
includes:

a) An interest rate risk philosophy governing the extent to which the bank is willing to
assume interest rate risk
b) Explicit and prudent limits on the bank's rate risk exposure

a) Interest rate risk philosophy

The capacity of the bank to assume interest rate risk will vary with the extent of other risks
such as liquidity risk, credit risk, foreign exchange risk, investment risk and ability to absorb
potential losses. The objective of interest rate risk management need not necessarily be
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 the complete elimination of exposure to changes in interest rates. Rather, to manage the
impact of interest rate changes within self imposed limits set after careful consideration of
a range of possible interest rate environments.

b) Interest rate risk limits

ABL established an explicit and prudent interest rate risk limit and ensures that the level of
interest rate risk exposure does not exceed these limits.
Interest rate risk limits has been set within the bank's overall risk profile, which reflects the
factors such as its capital adequacy, liquidity, credit quality, investment risk and foreign
exchange risk. Interest rate positions also be managed within the bank's ability to offset
such positions when necessary.

Changes in interest rates may affect earnings by following factors:

 Affecting the interest income or expenses relating to assets, liabilities and off-
balance sheet items.
 Affecting the value of fixed-rate assets, liabilities and off-balance sheet items that
are carried on a market valuation basis.
 Changes in interest rates affect the present value of the cash flows from the value
of these items and therefore the economic value of shareholders' equity.

Limits may also appropriately be defined in terms of regulatory capital, shareholders'

equity and earning assets.

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c) Calculation of Interest Rate Risk Limit:
Tk. in crore

Assets Amount Liabilities Amount

Rate Sensitive Assets: Rate Sensitive Liabilities:
Money at call & short notice: 3,418.00 Borrowing from other banks & FIs: 421.76
Govt. Securities 16,879.86 Savings Deposit: 22,750.31
Performing Loan: 42,966.67 SND: 16,373.22
Fixed Deposit: 30,785.50
Others Deposit Schemes: 4,276.96
Sub-Total: 63,264.53 Sub-Total: 74,607.75
Non-Rate Sensitive Assets: Non-Rate Sensitive Liabilities:
Cash: 6,742.77 Current Deposit: 4,510.97
Balance with other banks & FIs: 4,238.93 Bills Payable: 878.12
Other Investment: 8,158.90 Sundry, Call & Other Deposit: 1,733.91
Non-performing Loan: 6,392.93 Other Liabilities: 11,155.54
Fixed Assets: 1,525.63 Capital/Shareholders' Equity: 4,343.86
Other Assets: 6,906.46
Sub-Total: 33,965.62 Sub-Total: 22,622.39
Total 97,230.15 Total 97,230.15
According to the provisional balance sheet of the bank as on 31/10/2020, the Funding Gap
of the bank can be calculated as,
Where, Risk Sensitive Assets, RSA=Tk.63,264.53 crore
Risk Sensitive Liabilities, RSL= Tk.74,607.75 crore
So, FGAP = Tk. (63,264.53-74,607.75) crore
=Tk. -11343.22 crore

If Interest rate changes in ±1.00% ( ), then changes of Net Interest Income will be:

= Tk. -11343.22 crore X ±1.00%

= Tk. ±113.43 crore

If Interest rate changes in ±2.00% ( ), then changes of Net Interest Income will be:

= Tk. -11343.22 crore X ±2.00%

= Tk. ±226.86 crore
If Interest rate changes in ±3.00% ( ), then changes of Net Interest Income will be:

= Tk. -11343.22 crore X ±3.00%

= Tk. ±340.29 crore
On the basis of above analysis, the Interest Rate Risk Limit of the bank has been set at
Tk.320.00 crore. With the changes of Assets & Liabilities of ABL, the Interest Rate Risk Limit
may be changed accordingly.

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8.2.7 Interest rate risk management and control procedures

ABL developed and implemented an effective procedures and information systems to

manage and control interest rate risk in accordance with its interest rate risk policies.
These procedures are appropriate to the size and complexity of the bank’s interest rate
risk-taking activities.

Internal inspections and audits are key element in managing and controlling the bank's
interest rate risk management program. ABL uses them to ensure compliance with and the
integrity of the interest rate risk policies and procedures. Internal inspections and audits at
a minimum, randomly test all aspects of interest rate risk management activities in order
to:

a) Ensure interest rate risk management policies and procedures are being adhere to

b) Ensure effective management controls over interest rate risk positions

c) To verify the adequacy and accuracy of management information reports

d) Ensure that personnel involved in interest rate risk management fully understand the
bank's interest rate risk policies and risk limits and have the expertise required to make
effective decisions consistent with the interest rate risk policies. Assessments of the
interest rate risk operations should be presented to the board on regular basis for
review

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8.3 Equity risk

Equity price risk is the risk of losses caused by changes in equity prices. These losses could
arise because of changes in the value of listed shares held directly by the bank; changes in
the value of listed shares held by a bank subsidiary; changes in the value of listed shares
used as collateral for loans from a bank or a bank subsidiary, whether or not the loan was
made for the purpose of buying the shares; and changes in the value of unlisted shares.
Equity price risk associated with equities could be systematic or unsystematic. The former
refers to sensitivity of portfolio's value to changes in overall level of equity prices, while the
later is associated with price volatility that is determined by firm specific characteristics.

The equity risk of Agrani Bank Limited is "one-sided" – equity securities must be held at the
lower of cost or market value. If market value drops below cost, banks are required to form
loss allowances or "provisions" on the liability side of the balance sheet, by means of an
expense on the profit and loss statement. However, if market values rise above cost, there
is no corresponding income recorded unless the security is sold. Even though the one-sided
risk is purely in an accounting sense, it will have a real implication for banks that fall below
required levels of regulatory capital because of declines in the market value of securities
they hold. Accordingly, it is vitally important for banks to measure, monitor, and control
their equity market risk.

8.3.1 Effective equity price risk management

ABL has an effective equity price risk management system with following criteria:

a) Policies for equity investments reflect the board's risk appetite and provide clear
authorities, conservative limits and assigned responsibilities

b) These policies permit risk-taking authority consistent with the expertise of bank
personnel

c) Senior management are experienced in capital markets who establish strong policy
controls and risk limits.

d) Policy exceptions properly approved. There are formal procedures to report how and
why exceptions have occurred and how they have been resolved.

e) Trading and sales personnel are experienced in the traded instruments, technically
competent and comfortable with the bank's culture.

f) Risk management personnel have depth knowledge in equity market risk and risk
management principles.

g) Equity investments in companies that the bank has never before invested in are subject
to a formal review program, with all relevant bank units participating in risk assessment
and control procedures.
h) The firms in whose shares the bank or its subsidiary is considering investing is analyzed
rigorously and by reviewing as much or even more financial information, as would be
reviewed in a credit decision.
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 i) Management reports are prepared independently of the investing, trading function and
provide a comprehensive and accurate summary of their activity. Management reports
assess in compliance with policy limits, measures loss potential in both normal and
stress markets and produced in time. Management at all levels has to understand and
monitor equity price risk.

j) Incompatible duties must be properly segregated. Risk monitoring, valuation and

control functions are independent of the trading and investing functions.

k) The bank has to conduct stress tests regularly and a precise understanding and
measurement of how much and why profitability, balance sheet capital and regulatory
capital will be affected by major declines in the overall equity market or in the value of
individual shares.

l) As bank has a subsidiary that invests in shares directly or lends to customers for the
purchase of shares, it closely monitors the financial condition and performance of the
subsidiary and calculates its risk-adjusted return on the invested capital in that
subsidiary. The bank also redeploys that capital away from its subsidiary if the risk-
adjusted returns are low.

m) As the bank has shares in unlisted companies, the bank has to consider these
investments as extremely high-risk and devote significant staff resources to obtain,
verify and analyze financial information of these companies.

n) ABL has invested the illiquidity of investments in unlisted companies. So, ABL has a
detailed exit strategy for disposing of these investments in the event that of they no
longer fit into the bank's desired business strategy.

8.3.2 Securities portfolio management program

The securities portfolio management of ABL involves prudently managing the risk
relationship, controlling and minimizing securities portfolio risks across a variety of
dimensions. These includes quality, portfolio diversification, maturity, volatility,
marketability, type of security and the need to maintain adequate liquidity.

Securities portfolio management program requires:

a) Establishing and implementing sound and prudent policies to effectively manage the
securities portfolio, securities activities and position risk.

b) Developing and implementing effective securities portfolio management processes

governing securities investment decision making and authority.

c) Developing and implementing comprehensive procedures to effectively monitor and

control the nature, characteristics and quality of the securities portfolio and the extent
of position risk assumed.

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 a) Securities portfolio management policies

ABL has an effective securities portfolio management program which clearly defined
policies, formally established in written that set out the securities portfolio management
objectives of the bank and the parameters under which securities activities are to be
undertaken and controlled.
The bank will establish explicit and prudent securities portfolio management objectives
governing like as below:

i. The extent to which ABL is willing to assume position risk.

ii. General areas of securities activities in which the bank is prepared to engage or is
restricted from engaging, including its policy with respect to acquiring securities of
related parties.

iii. Minimum quality and rate of return expectations for the securities portfolio.

iv. Securities portfolio concentration and exposure limits.

b) Securities portfolio management process

To develop and maintain a sound securities portfolio, ABL has:

i. An effective formal evaluation process that provides for an objective analysis and
assessment of securities investment proposals

ii. Clearly defined, prudent and appropriate levels of delegation of securities transaction
approval authority, formally established in writing.

c) Securities portfolio monitoring and control procedures

ABL developed an effective and comprehensive procedures, accounting policies and

information systems to monitor and manage the characteristics and quality of its securities
portfolio. These procedures are appropriate to the size and complexity of the bank's
securities activities which includes:

i. Systems to measure and monitor securities positions.

ii. Controls governing the management of the securities portfolio.

iii. Independent inspections or audits.

i) Systems to measure and monitor

Managing securities activities needs a clear understanding of the nature and characteristics
of the securities portfolio and securities positions. To make these determinations ABL
ensures that:

a) Effective information systems are developed and used to appropriately record,

regularly monitor and evaluate the securities portfolio.

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b) Effective quality and performance criteria are developed and portfolio is regularly
assessed against these criteria.

c) Appropriate and conservative accounting policies and procedures are developed,

documented and implemented to properly classify and carry securities on the books of
account of the bank and recognize income related to such securities.

Regular evaluations of the securities portfolio are carried out to provide an effective means
of ensuring portfolio performance and quality is meeting the bank's securities portfolio
management policies and objectives. The portfolio is not unduly concentrated by types of
security, by single and associated groups of issuers who are connected to the bank.

ii) Securities portfolio management controls

Effective procedures and controls ensure that securities activities are in compliance with
the bank’s securities portfolio management policies. It also provides safeguards to protect
the bank from potential losses by ensuring that unauthorized exposure does not occur
from improper or uncontrolled securities activities.

Although the controls over securities activities will vary among banks depending upon the
nature and extent of their activities, the key elements of any securities portfolio
management control program are well-defined as below:

a) organizational controls to ensure that there exists a clear and effective segregation of
duties between those persons who authorize, initiate or supervise securities activities
and those persons who are responsible for operational functions such as the physical
custody of securities or arranging prompt and accurate settlement of securities
transactions or account for securities activities.

b) procedural controls to ensure that securities are properly recorded and accounted for
by the bank, transactions are settled in a timely and accurate manner and unauthorized
securities activities are quickly identified and reported to the management and

c) Control to ensure that securities activities are monitored frequently against the bank’s
securities portfolio management policies and risk limits.

Moreover, the bank ensures that employees conducting securities trading activities on
behalf of the bank do so with a written code of conduct or guidelines governing securities
dealing. This guidelines or code of conduct provides guidance respecting trading with
related parties and transactions in which potential conflicts of interest exist. These also
include trading with affiliated entities, personal trading and investment activities of
securities portfolio management personnel, including trading on insider information and
taking personal gain from one's position, and trading relationships with securities dealers
with whom the bank deals.

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 iii) Independent inspection/audit

ABL has an independent inspections/audits division that provides assessment of the

securities portfolios’ existence, quality and value, the integrity of the securities portfolio
management process and they promote the detection of problems relating thereto. ABL
uses these to ensure compliance with and the integrity of the securities portfolio
management policies and procedures. The independent inspection/audit team of the bank
at a minimum and over a reasonable period of time, test the bank's securities portfolio
management, activities in order to:

a) To ensure that securities activities are in compliance with the bank's securities portfolio
management policies and procedures and with the laws and regulations to which these
activities are subject.

b) To ensure that securities transactions are duly authorized and accurately and
completely recorded on the books of the bank.

c) To ensure that recorded securities are conservatively valued on the books of the bank.

d) To confirm that securities held by depositories to the order of the bank conform to the
records of the bank

e) To ensure that the bank management has established suitably designed controls over
securities positions and such controls operate effectively.

f) Ensure the adequacy and accuracy of management information reports regarding the
bank's securities portfolio management activities

g) To ensure that personnel involved in securities portfolio management are provided

with accurate and complete information on the bank's securities portfolio management
policies and risk limits and have the expertise required to make effective decisions
consistent with these policies.

8.3.3 Securities portfolio concentration limits

Development of clearly defined and documented securities portfolio concentration limits is

under process that ensure the nature and level of a bank’s exposure in the form of
securities position is appropriately diversified and does not exceed sound and prudent
limits.

Securities portfolio concentration occurs when the bank's securities portfolio contains an
excessive level of exposure to one type or class of security or a single or group of
associated issuers of securities. At a minimum, securities portfolio diversification policies
must place sound and prudent aggregate and individual exposure limits for each type or
class of security, and for single issuers and groups of associated issuers in which the bank is
permitted to invest. Usually, limits by class of security include limits for how much of the
portfolio should be made up of specific types of securities such as equities and the
portfolio concentration by industrial sector. Such limits need to be established in the
context of the bank’s aggregate exposure to a single issuer or group of associated issuers in
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 terms of both securities and credit exposures. The management of such aggregate
exposures is usually done by a senior level securities trader and lending personnel so as to
ensure that appropriate "firewalls" are maintained between the securities portfolio and
credit risk management areas of the bank. Securities concentrations by single or associated
issuer need to be reviewed regularly.

8.3.4 Securities analysis and assessment

ABL made decisions to investment securities only after careful examination and
consideration of several areas including:

a) The bank’s securities portfolio management policies, other corporate objectives and
policies, such as the nature of the bank's liabilities and the need to maintain adequate
liquidity.
b) Potential risks and returns related to a particular security within the overall context of
the bank’s securities portfolio management policies. The composition of the securities
portfolio and the reasonable expectation of a fair return or appreciation given the
nature of the security and the risk of loss or impairment.

c) Current, projected regulatory and financial environment under which securities

transactions are occurred.

d) Investment alternatives.

8.3.5 Securities transaction approval authorities

ABL has a clearly defined and appropriate level of securities transaction authority to ensure
that the bank’s securities activities are appropriately undertaken and that securities
positions do not exceed the limits established under its securities portfolio management
policies. Approval limits will relate to type of security, size, maturity or other criteria.
Authorities will be absolute, incremental or a combination thereof and also be individual,
pooled, or shared within a committee. The delegation of authority is clearly documented
and includes:

a) The absolute and incremental securities transaction approval being delegated.

b) The units, individuals, positions or committees to whom securities transaction authority

is being delegated.

c) The ability of recipients to further delegate approval authority.

d) The restrictions placed on the use of delegated authority.

The degree of delegation of securities transaction authority will depend on a number of

variables including:

ii. The bank’s securities portfolio management objectives and overall risk philosophy.

iii. The quality of the securities portfolio.

iv. The ability of the bank to absorb losses.

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iv. The size and types of securities and the complexities of risks being assessed.

v. The experience and ability of the individuals responsible for carrying out the securities
portfolio management activities.
vi. Consideration of security portfolio concentration limit.

Assessments of the securities portfolio management activities are presented to the bank's
BoD on a timely basis for review.

8.3.6 Measuring equity price risk

Value at risk (VaR)

Value at Risk (VaR) is generally accepted and very much popular tool for measuring market
risk inherent in trading portfolios. VaR summarizes the predicted maximum loss over a
target horizon within a given confidence level. It is a statistical estimate of expected
potential loss that is derived by translating the riskiness of any financial instrument into a
common standard. The bank uses a 99% or a 95% confidence level and each day return on
its trading portfolios. That means about once (with 99% confidence) or five (with 95%
confidence) in every one hundred days the trading position are expected to lose more than
the VaR estimate. An inherent limitation of VaR is that it gives no information about how
much losses could exceed their expected levels. Generally, there are three methods of
computing VaR:
a) Parametric or variance-covariance method.

b) Historical simulation method.

c) Monte Carlo simulation method.

Among these methods, the historical simulation method is simple to apply and fairly
straightforward to explain. Data sets used for this method are easily available. Therefore,
the banks are encouraged to calculate VaR for secondary market shares that are held for
trading using historical simulation method. However, to calculate the VaR for overall
investment portfolio of the bank generally uses the variance - covariance method.

Variance-covariance method

The following formula can be used to assess the VaR of a portfolio consisting more than
two stocks:

Portfolio VaR= Total Portfolio X SD of Portfolio

Where,

Standard Deviation, SD = [S₁2 + S22+ S32+ 2S1S2P (1, 2) + 2S1S3P (1, 3) + 2S2S3P (2, 3)] 1/2

Here,

S1 = the standard deviation or volatility of the first asset

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 S2 = the standard deviation or volatility of the second asset

S3 = the standard deviation or volatility of the third asset

P = Correlation

Historical simulation method

Let us assume ABL has a portfolio of three stocks of one unit each. To calculate VaR of that
portfolio the bank needs to collect the historical market price of each of the stocks in the
portfolio for last 100 days. Then the following formulas are to be applied:
Closing Market Price of Stock, A
a) WeightA =
Closing Market Price of Stock, (A+B+C)
Total weighted return
b) Total weighted return portfolio market price = X 100
Closing Market Price of Stock, (A+B+C)
Then, the 99th percentile will be the VaR at 99% confidence level.

8.4 Managing market risk

ABL put in place a set of systems and procedures appropriate to its size and complexity of
its operations for identifying, measuring monitoring and controlling market risk. The risk
appetite in relation to market risk assessed keeping in view the capital of the bank as well
as exposure to other risks. Once the market risk appetite is determined, ABL develop a
strategy for market risk-taking in order to maximize returns while keeping exposure to
market risk at or below the predetermined level.

8.5 Stress testing

The risk measurement system of ABL supports a meaningful evaluation of the effect of
stressful market conditions. Stress testing designed to provide information of the kinds of
conditions under which strategies or positions would be most vulnerable and thus be
tailored to the risk characteristics of the bank. The stress scenarios include:

a) Abrupt changes in the general level of market rates

b) Changes in the relationships among key market rates
c) Changes in the slope and the shape of the yield curve
d) Changes in the liquidity of key financial markets or changes in the volatility of market
rates.
e) Conditions under which key business assumptions and parameters break down.

In conducting stress tests, special consideration given to instruments or markets where

concentrations exist as such positions more difficult to liquidate or offset in stressful
situations. ABL consider "worst case" scenarios in addition to more probable events.
Management and the board of directors periodically review both the design and the results
of such stress tests and ensure that appropriate contingency plans are in place. Stress
Testing is conducted by Risk Management Division of the bank.

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 CHAPTER-09: Interest Rate Policy
9.1 Overview of Interest Rate Policy
The bank earns a spread on the money it lends out from the money it takes in as a deposit. The
Net Interest Margin (NIM), which represents this spread that is simply the difference between
what it earns on loans versus what it pays out as interest on deposits.
The overview of how ABL determine the interest rate is as below:
ABL generally free to determine the interest rate they will pay for deposits and charge for
loans. But ABL has to face the competition into account as well as the market levels for
numerous interest rates in compliance with Bangladesh Bank policies. Bangladesh Bank
influences interest rates by setting certain rates, stipulating bank reserve requirements and
buying and selling “risk-free” Bangladesh Government Treasury Bills, Bonds to affect the
deposits that banks hold at the central bank. This is referred to as monetary policy and is
intended to influence economic activity as well as the health and safety of the overall banking
system.
Bangladesh Bank uses to influence monetary policy by setting the Repo & Reverse-Repo rates
which is simply the rate at which banks can borrow and lend with Bangladesh Bank. Many
other interest rates including the Dhaka Interbank Offer Rate (DIBOR), 91 days BCR
(Bangladesh Compounded Rate), 182 days Treasury Bills rate which is a indicative rate that
banks use for the ideal customer with a solid credit rating and payment history. Other
considerations that ABL take into account are expectations for inflation levels, stock market
levels and the demand and velocity of money in local and global market.

The related other factors that ABL considered for determination of interest rate are as follows:

9.2 Market-based Factors

Generally, ABL borrow or pay short-term rates to depositors and lend through making loans at
the longer-term. By doing this successfully, it will make money and please stakeholders. An
inverted yield curve, which means that interest rates on short-term spectrum are higher than
long-term rates makes it quite difficult for a bank to lend profitably. Fortunately, inverted yield
curves occur infrequently and generally don’t last very long.

9.3 Economic Factor

Economic factors including the level and growth in Gross Domestic Product (GDP) and inflation
are key factor for interest rate determination. ABL also consider the interest rate volatility
during interest rate fixation. These factors affect the demand for loans which can help push
rates higher or lower. Local market considerations are also important. Shallow market like
Bangladesh may have higher rates due to lower competition as well as the fact that loan
markets are less liquid and have lower overall loan volume.

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9.4 Client Inputs

ABL try to offer best rate for its most credit-worthy customers which has a very high likelihood
of the loan being paid back in full and on time. But some other factors are consider such as-
how much a customer borrows, credit rating and the overall relationship with the bank.

Sufficient and quality of collateral against loan also plays a major role for rate fixation. The loan
duration or how long to maturity is also important. With a longer duration comes a higher risk
that the loan will not be repaid. This is generally why long-term rates are higher than short-
term ones. ABL also look at the overall capacity of customers to take on debt.

9.5 A Summary of Different Interest Rates

There are many types of interest rates for various loan products. During loan rates
determination process of trading loan, project loan, SME loans, cash credit and other
continuous loans, ABL follows Net Interest Margin (NIM), other commercial and peer banks
rates as well.

9.6 The Bottom Line

ABL uses an array of factors to set interest rates to maximize profits through the NIM for their
shareholders. On the flip side, consumers and businesses seek the lowest rate possible. A
common-sense approach for getting a good rate is to turn the above discussion on its head or
look at the opposite factors from what the bank might be looking for.

9.7 Fund Transfer Pricing (FTP)

Funds transfer pricing is a way to value the margin contribution from each individual loan and
deposit that a bank has on their books. The way each instrument is valued is by calculating a funds
transfer charge on the asset side (loans) and funds transfer credit to the liability side (deposits).

The funds' transfer charges and credits are calculated based on the bank's opportunity cost of
borrowing at the time of origination. The value assigned to a deposit account would be equal to
the difference between the costs of an equivalent term borrowing less the cost that is being paid
on the instrument. FTP is, therefore, a revenue adjustment made to the bank's balance sheet to
reflect the cost of funding.

Concept & Objectives of FTP

Transfer pricing is a major strategic management tool to quantify cost of deposit that addresses a
number of management issues: -

 to allow the netting of liquidity deficits and excesses within the bank

 to set the rules for margin calculations

 to serve as a base for determining the rate of assets & liabilities

 to allocate the costs of funds to branches

 to transfer financial, liquidity and interest rate risks from business units upward to ALCOM.

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Performance Measurement:
Performance of branches can be measures through annual profit and loss or more frequently
depending on reporting capabilities. Generally, the major component of income is the interest that
deposit-raising branches receive from Head Office on funding provided to the rest of the Bank. On
the other hand, the major portion of expenditure, at branches giving advances, is the interest paid
by the branches to Head Office for the funding provided to them.

The ancillary objectives of Agrani Bank's Transfer Pricing policy are:

 Strategic tool for management. The Transfer Pricing also acts as a strategic tool available to
ALCOM for directing the flow of funds to ensure utilization of resources in the most
efficient and profitable manner thereby managing risks and adhering to pre- determined
financial standards and goals established in the financial plan.

 Provide consistent guidance in product pricing analyses. The overall performance of the
Bank depends upon market conditions. These conditions should be reflected in the pricing
of products. Transfer pricing provides guiding rates that can be used for pricing of funds
internally in a way so as to instill discipline on loan pricing while simultaneously providing
right incentives for deposit gathering.

Fund Transfer Pricing (FTP) of ABL:

The rate at which branches pay to head office against borrowing of fund or branches receive
from head office against lending is known as Fund Transfer Pricing (FTP). ABL has its own policy
to fix its FTP. Like other banks or FIs, ALCOM determines the rate of Deposits, Advances and
Inter-branch A/Cs (MO, NG, CMO, CNG) for proper balance sheet management.

As on 31/12/2020, FTP or rate of inter-branch A/Cs (MO, NG, CMO, CNG) of ABL is 6.75% for
debit balance and 7.00% for credit balance i.e. if net-off balance of inter-branch A/Cs of a
branch is debit figure then it will receive 6.75% interest from head office. On the other hand, if
net-off balance of inter-branch A/Cs of a branch is credit figure then it will pay 7.00% interest
to head office.

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 CHAPTER-10: Investment Policy

10.1 Overview of Investment Policy

Banks are financial intermediary that operates between a saver who deposits money in a
bank and a borrower who receives a loan from that bank and make investment as well. An
investment by the bank is the outlay of its funds for a long period without creating any
credit. ABL invest in government securities, subordinated bonds, commercial papers,
bridge financing, shares and debentures while in the case of a loan, the bank disburse fund
against securities/collaterals.

The investment policy of ABL established with a view to retaining high returns from its
surplus funds. But it has to keep in view the safety and liquidity of its resources to meet the
potential demand of its customers. ABL has a strong committee named “Investment
Committee of Agrani Bank Limited and Agrani Equity & Investment Limited” to make
investment related decision. Moreover, Treasury Division of ABL may place its investment
proposals to Credit/Investment Committee before placing to the BoD meeting except
Treasury Bills/Bonds, Bangladesh Bank Bills, Subordinated bonds of banks.
The balance sheet is a statement of the assets and liabilities of the bank. The assets of the
bank are distributed in accordance with certain guiding principles. These principles
underline the investment policy of the bank. They are discussed below:
10.2 Liquidity
In the context of the balance sheet of the bank the term liquidity has two interpretations.
First, it refers to the ability of the bank to honor the claims of the depositors. Second, it
predicts the ability of the bank to convert its non-cash assets into cash easily and without
any loss.
It is a well-known fact that a bank deals in funds belonging to the public. Hence, the bank
should always be on its guard in handling these funds. The bank should always have
enough cash to meet the demands of the depositors.
In fact, the success of a bank depends on the considerable extent upon the degree of
confidence it can instill in the minds of its depositors.
If the depositors lose confidence in the integrity of the bank, the existence of the bank will
be at stake. So, the bank should always be prepared to meet the claims of the depositors
by having enough cash.

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 Among the various items on the assets side of the balance sheet, cash on hand represents
the most liquid asset. Next comes cash with other banks and the central bank. The order of
liquidity goes on descending.
Liquidity also means the ability of the bank to convert its non-cash assets into cash easily
and without any loss. The bank cannot have all its assets in the form of cash because cash
is an idle asset which does not fetch any return for the bank.

Money at call and short notice, term placement, bills discounted etc. are some form of
assets of the bank that could be converted into cash easily and without any loss.

10.3 Profitability

As a commercial bank by definition, ABL is a profit hunting institution. The bank has to earn
profit to earn income to pay salaries to the staff, interest to the depositors, dividend to the
shareholders and to meet the day-to-day expenditure.

Since cash is the least profitable asset to the bank, there is no point in keeping all the
assets in the form of cash on hand. The bank has to generate income. Hence, some of the
items on the assets side are profit yielding assets.

They include money at call and short notice, term placement, bills discounted,
investments, loans and advances etc. Among them, the least liquid asset is loans and
advances which constitute the most profitable asset to the bank. Much of the income of
the bank accrues by way of interest charged on loans and advances. But the bank has to be
highly discreet while loan disbursement.

10.4 Diversity

ABL invest its funds in such a way as to secure for itself an adequate and permanent return.
While investing its funds, the bank never keep all its eggs in the same basket.
Diversification of investment is necessary to avoid the dangerous consequences of
investing in one or two channels.

To ensure a regular flow of income by investment diversification, ABL try to invest its funds
in different types of investment products.

10.5 Marketability of Securities

ABL also try to invest its funds in such types of securities that can be easily marketed at the
time of emergency. ABL cannot afford to invest its funds in very a long-term security or
those securities which are not easily convertible.

ABL always give priority to invest its funds in government securities or in first class
securities or in debentures of reputed firms. ABL also afford to disburse loans among highly
rated company/firms.

10.6 Stability in the Value of Investments

To avoid unusual losses from price fluctuation on stock and security trading, ABL try to
invest its funds in nonvolatile and stable stocks and securities. ABL try to avoid investment
in securities which are subject to frequent price fluctuations.

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10.7 Principles of Tax-Exemption of Investments

The investment policy of ABL based on the principle of tax exemption of investments. ABL
try to invest in those government securities which are exempted from income and other
taxes. Which will help the bank to increase its profitability.

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 CHAPTER-11: Methodology for Setting Limit

11.1 Methodology for Setting Counterparty Limit

The issue of counterparty limits arises from the risk that a counterparty with whom the
Bank has a reciprocal agreement is unable to perform its obligations in a financial
transaction. ABL has an appropriate counterparty limits in place for its treasury operation.
The limit structure depends on credit risk appetite based on credit risk policies as well as
target market criteria. Credit risk limits set by the credit risk approving unit such as BoD.
However, these may be altered according to changing circumstances revealed either in
periodic reviews or real-time credit or market risk assessments.

11.2 Procedures and Limits:

Agrani Bank Limited already established appropriate procedures, processes and limits to
implement their liquidity policies. The procedural manual explicitly narrates the necessary
operational steps and processes to execute the relevant liquidity risk controls.

11.2.1 Limits for Local Currency Dealing:

In order to determine the counterparty limit for each financial institution, a systematic
appraisal shall be undertaken in a manner as to determine the quality of counterparties and
the corresponding prudential exposure limit and pricing/terms.
11.2.1.1 Counter Party Limit For Banks:
Particulars Score Break of score
Capital Adequacy Ratio 20 ≥12.50-20; ≥12-19; ≥11.25-18; ≥11-15; ≥10-12; ≥8-8; <8-0

Liquidity Coverage Ratio 10 ≥200-10; ≥180-8; ≥150-6; ≥120-5; ≥100-2; <100-0

(LCR)
Advance Deposit Ratio 10 <60-8; 60 to 64.99-9; 65 to 69.99-10; 70 to 74.99-9; 75 to
(ADR) 79.99-8; 80 to 84.99-6; 85 to 89.99-5; 90 to 95-3, >95-0

Cost of Fund 10 <5-10; 5 to 5.99-8; 6 to 7.99-6; 8 to 9.99-4; 10 to 12-2; >12-0

Return on Equity 10 ≥10-10; ≥8-8; ≥5-5; <5-0

Earnings per Share 5 >100-5; 80 to 100-4; 60 to 79.99-3; 30 to 59.99-2; 1 to 29.99-
1; <1-0
Classified Loan 15 0-15; 1 to 4.99-12; 5 to 9.99-10; 10 to 14.99-8; 15 to 19.99-5;
20 to 29.99-2; >30-0
Credit Rating 5 Excellent-5; Good-4; Fair-3; Poor-1; Bad-0
Year of Incorporation 5 1971 to 1990,5; 1991 to 2000,4; 2001 to 2010,3; >2010,2

Qualitative Judgment* 10 Score to be distributed on the basis of market reputation and

present exposure
Total Score 100

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* Limit will be set on the basis of following criteria:
Sl. No. Score Limit (Tk. Crore)
01 80-100 300.00
02 75-79 250.00
03 70-74 200.00
04 65-69 180.00
05 60-64 150.00
06 55-59 120.00
07 50-54 100.00
08 45-49 80.00
09 40-44 50.00
10 Below 40 0.00
** For state owned commercial bank i.e., Sonali Bank Limited and Janata Bank Limited the limit
will be TK 500.00 crore. For Rupali Bank Limited the limit will be TK 300.00 crore.
** For newly approved Banks for first year, counter party limit may be set on the basis of their
paid up capital.
11.2.1.2 Counter Party Limit For NBFI's
Particulars Score Break of score
Equity 25 ≥200-25; ≥180-22; ≥160-20; ≥150-18; ≥130-15;
(Taka in crore) ≥120-12; ≥110-10; ≥100-8; ≤100-0
Capital Adequacy Ratio 10 ≥12-10; ≥11-9; ≥10-8; ≥9-6; ≥8-5; <8-0
Net Profit to Operating Revenue 10 ≥40-10; ≥30-8; ≥20-5; ≥10-3; ≥5-2; <5-0
Return on Equity 10 ≥30-10; ≥20-8; ≥10-6; ≥8-4; ≥7-2; ≥5-1; <5-0
Return on Assets 5 ≥10-5; ≥7-4; ≥5-3; ≥3-2; ≥1-1; <1-0
Earnings per Share 10 ≥100-10; 80 to 99.99-8; 60 to 79.99-6; 40 to 59.99-5;
30 to 39.99-4; 20 to 29.99-3; 1 to 19.99-1; <1-0
Classified Loan 20 0-20; 1 to 4.99-18; 5 to 9.99-15; 10 to 14.99-10; 15 to
19.99-5; 20 to 30-2; >30-0
Qualitative Judgment* 10 Score to be distributed on the basis of market
reputation and present exposure
Total Score 100
* Limit will be set on the basis of following criteria:
Sl. No. Score Limit (Tk. Crore)
01 80-100 150.00
02 75-79 120.00
03 70-74 100.00
04 65-69 80.00
05 60-64 70.00
06 55-59 60.00
07 50-54 50.00
08 45-49 40.00
09 40-44 30.00
10 35-39 20.00
11 Below 35 0.00

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11.2.2 Limit for Foreign Exchange Dealing:

The limits for foreign exchange dealing have set by the management as follows:

Our dealing room is allocated with specific dealing limit of USD 2.50 million details as
under:

Overall Dealing Room Limit for Total Open positions at any point of time Us$ 2.50 million
Total Overnight Limit for Dealing Room Us$ 1.25 million

Head of Treasury DGM Overall position limit US$ 1.00 million

Chief Dealer Single Deal Limit US$ 500,000
Overnight Limit US$ 500,000
Deal outstanding limit US$ 300,000
Overall stop loss limit US$ 2,500
Trigger Level US$ 1,500
(Defined as: Notifying dealing room supervisor
if position hit a loss at this level, CEO will
nominate overall supervisor of dealing room)

Senior Principal Officer Overall position limit US$ 750,000

Single Deal Limit US$ 375,000
Overnight Limit US$ 375,000
Deal outstanding limit US$ 200,000
Overall stop loss limit US$ 2,000
Trigger Level US$ 1,200
(Defined as: Notifying dealing room supervisor
if position hit a loss at this level, CEO will
nominate overall supervisor of dealing room)

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 Principal Officer Overall position limit US$ 500,000
Single Deal Limit US$ 250,000
Overnight Limit US$ 250,000
Deal outstanding limit US$ 200,000
Overall stop loss limit US$ 1,500
Trigger Level US$ 1,000
(Defined as: Notifying dealing room supervisor if
position hit a loss at this level, CEO will nominate
overall supervisor of dealing room)
Senior Officer Overall position limit US$ 250,000
Single Deal Limit US$ 125,000
Overnight Limit US$ 125,000
Deal outstanding limit US$ 100,000
Overall stop loss limit US$ 1,250
Trigger Level US$ 1,000
(Defined as: Notifying dealing room supervisor if
position hit a loss at this level, CEO will nominate
overall supervisor of dealing room)

N.B: For the time being overnight limit to be kept in abeyance until further order.

1) The overall dealing room limits should also be monitored by the back office and the
dealing room supervisor should be notified immediately upon any breach of the limits
by the back office in charge.

2) A reporting format prepared to report overall daily trading activities to be submitted to

the FX dealing room supervisor at the end of each day including positions taken and
squared, profit/losses and outstanding open positions.

3) The dealing room supervisor will have the discretion to allow trading during holidays
and any off-site dealing activities.

4) All transactions should be conducted through the dealing room by using the dealing
room phones.

5) Voice recorder for the dealing room, telephone lines should be in place.

6) The mid office/back office should cross verify the open position statement to the
dealing room supervisor on a daily basis.

For requirement based deals the dealers can be dealt as per requirement of the customer.
In that case the dealers have to follow counter party limits set in Foreign Exchange Risk
Management Manual.

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 CHAPTER-12: Trading of Government Securities

12.1 Procedure of Government Securities Trading

ABL has a clearly defined and appropriate level of securities transaction authority to ensure
that the bank’s securities activities are appropriately undertaken and that securities
positions do not exceed the limits established under its securities portfolio management
policies. Approval limits may relate to type of security, size, maturity or other criteria such
as the retention or delegation of voting rights acquired through securities. Authorities will
be absolute, incremental or a combination thereof and also be individual, pooled, or
shared within a committee. The delegation of authority is clearly documented and
includes:

a) The absolute and incremental securities transaction approval being delegated.

b) The units, individuals, positions or committees to whom securities transaction authority
is being delegated.
c) The ability of recipients to further delegate approval authority.
d) The restrictions placed on the use of delegated authority.

The degree of delegation of securities transaction authority will depend on a number of

variables including:

i. The bank’s securities portfolio management objectives and overall risk philosophy.
ii. The quality of the securities portfolio.
iii. The ability of the bank to absorb losses.
iv. The size and types of securities and the complexities of risks being assessed.
v. The experience and ability of the individuals responsible for carrying out the securities
portfolio management activities.

Assessments of the securities portfolio management activities to be presented to the

bank's BoD on a timely basis for review.

12.2 Trading of Govt. Securities

12.2.1 Primary Auction

As a member of Primary Dealers, ABL has the obligation to purchase government

securities from primary auction. The G. Sec dealers have to take prior approval for
participation in primary auction of Treasury Bills, Bonds, Bangladesh Bank Bills. Auction
amount, participation amount, obligations if any, market yield, yield offer to purchase,
liquidity position and market forecasting have to mentioned in notes.

Page 79 of 110
12.2.2 Secondary Trading

ABL has a trading portfolio in government securities. The scope of selling securities in
secondary market is limited. The bank has an opportunity to earn money by high yielding
securities in liquid market. It can also make money from purchasing high yielding securities
in decreasing trend of yield forecasting future liquid market.

G. Sec is considered as high-quality liquid assets. Government securities can be liquated at

the time of liquidity crisis. The dealers are authorized to sale securities 0.01% loss
compared to market price. For all transactions the dealers have to get prior approval from
Managing Director & CEO through line management on case to case basis.

a) In case of sale of Govt. Securities, the dealers (Dealing Room) should follow the under
mentioned limits:
Fig. Taka Crore
Dealers Per day Trading Per day Per deal Per deal stop-loss limit
Designation Limit Stop/Loss Limit limit

SPO 100.00 0.15 50.00 0.10

PO 75.00 0.10 40.00 0.05
SO 50.00 0.05 25.00 0.03
Officer 30.00 0.03 15.00 0.02

b) In case of purchase of Govt. Securities, the dealers (Dealing Room) should follow the
under mentioned limits:
Fig. Taka Crore
Dealers Per day Trading Limit Per deal Remarks
Designation limit
SPO 100.00 50.00 purchase should be at
market value or at discount
PO 75.00 30.00 purchase should be at
market value or at discount
SO 40.00 20.00 purchase should be at
market value or at discount
Officer 25.00 10.00 purchase should be at
market value or at discount

Page 80 of 110
 Appendix-I: Form & Format

Form & Format

(Confidential)
AGRANI BANK LIMITED
TREASURY DIVISION
Head Office, Dhaka

FUND POSITION (PROVISIONAL) AS OF ________

(Specimen)
A. CRR (Cash Reserve Requirement) POSITION
1. Available : ____
2. Requirement (*.......% CRR = ____) + (*.....% T.T. Discount Limit = ___) : ____
3. Surplus/(Shortfall) (2-1) : ____

B. *........% SLR Position

1. Available : ____
2. Requirement : ____
3. Surplus/(Shortfall) : ____

C. SLR (Statutory Liquidity Reserve) POSITION

1. Available : ____
2. Requirement (*.....% SLR = ____) + (*.....% T.T. Discount Limit = ___) : ____
3. Surplus/(Shortfall) (2-1) : ____

D. CASH POSITION (Excluding Till Money Balance with Sonali Bank & F.C. Balance)
1. Cash Surplus/(Shortfall) in CRR : ____
2. Cash kept in CRR A/C to meet short-fall in Approved Securities : ____
3. Investment under Inter-Bank Repo (+) : ____
4. Borrowing under Inter-Bank Repo (-) : ____
5. Bangladesh Bank Reverse Repo : ____
6. Call Loan allowed to different Banks and FIs (+) : ____
7. Call Loan availed from other Banks and FIs (-) : ____
8. Overall Liquidity Surplus/(Shortfall) : ____

E. TOTAL LIQUDITY POSITION

1. Surplus/(Shortfall) in SLR (*....%) : ____
2. Net Call Loan (difference between Call Loan Allowed & Availed) : ____
3. Term Deposit Balance with other Banks : ____
4. Domestic Borrowing from Government & BB (except REPO) : ____
5. Overall Liquidity Surplus/(Shortfall) : ____

F. FUND REQUIREMENT FOR INDUSTRIAL LOAN

1. Undisbursed industrial loans as of ____________) : ____
As of (date) Amount compared to (date) Compared to (date)
Deposits
Advances
Call Deposit (%)
* Percentage set by Bangladesh Bank from time to time

Page 81 of 110
 AGRANI BANK LIMITED
TREASURY DIVISION
Head Office, Dhaka

STATEMENT OF CALL LOANS TO BFIs & NBFIs

(Date) (Date) (Date)

S.l. No. Name of Institution
Amount Rate Amount Rate Amount Rate
Local Private Commercial Banks

Foreign Commercial Banks

Nationalized Commercial Banks

Specialized Banks

NGOs

Non-Bank Financial institutions

Totals
Totals Weighted Average (%)
Minimum (%)
Maximum (%)
Estimated Income (in Lac Taka)
(Specimen)

Page 82 of 110
 AGRANI BANK LIMITED
TREASURY DIVISION
Head Office, Dhaka

STATEMENT OF CALL LOANS BORROWINGS FROM OTHER BANKS

(Specimen)

(Date) (Date) (Date)

SL No. Name of Institution
Amount Rate Amount Rate Amount Rate

Totals Weighted Average (%)

Minimum (%)
Maximum (%)
Expense for call loan(s) availed (Lac Taka)
Today’s profit from borrowing

Page 83 of 110
 AGRANI BANK LIMITED
TREASURY DIVISION
Head Office, Dhaka

TERM PLACEMENTS as of _______________

(Specimen)

(Date) (Date) (Date)

S.l. No. Name of Institution
Amount Rate Amount Rate Amount Rate
Banks

Total:
Non-Banks

Total:
Grand total:

Summary:

Page 84 of 110
 AGRANI BANK LIMITED
TREASURY DIVISION
Head Office, Dhaka

COST OF FUNDS & NET INTEREST MARGIN as of _______________

(Specimen)

Bonds &
SL Others Total Grand
Particulars FDR SND Savings DPS APS CD GPF Other
# * Deposits Total
Loans
1 Amt of Average
Deposit **
2 CRR (6.50%)
3
SLR (13.00%)
4 Funds available
for investment
5 Interest Cost
6 Earnings on SLR
@ __%
7 Interest Cost for
Maintaining
SLR (5 - 6)
8 Cost of Deposit
((7 / 4) x 100)
9 Total Interest
Cost
10 Administrative
Cost (9 - 5)
11 Administrative
Cost in % (10 / 4)
12 Total Cost of
Fund (8+11)
13 Ave. Yield on just
Loans & Advances
14 Net Interest
Margin on Loans
& Advances

* Breakdown of Others:

Page 85 of 110
 Structural Liquidity Profile
Agrani Bank Limited
Date..................
(In crore Tk.)
2-7 8 Days - 1-3 3 -12 1-5 more than
CALL Total
Days 1 month months months years 5 years
ASSETS (INFLOW)
Cash in hand (Lcy+Fcy)
Balance with Bangladesh Bank (Lcy)
Balance with B.B (Fcy)
Balance with other banks and financial Institutions
Money at call short notice
Investment in G-SEC
Other Investment(Share, Debenture & bond, MFU
and others)
Loans and Advances
Bills Purchased & discounted
Reverse Repo with Bangladesh Bank
Reverse Repo with others
Fixed assets including premises, furniture and fixtures
Other assets
Non-banking assets
Other receivables
Total Inflows
Liabilities: (OUTFLOW)
Borrowing from Bangladesh Bank (Refinances , etc)
Repo/LS with Bangladesh Bank
Repo with other banks & Fls
Borrowing from other banks & Fls
Money at call short notice
Demand Deposit
Savings bank deposit
Fixed Deposit
Bills Payable
Provision and other liabilities
Capital & Reserve
Total Outflows
Letter of Credit/Guarantees (Net of margin)
Other OBS Items (Net of margin)
Available Balance with BB (Fcy)
Net Nostro a/c balance
NET MISMATCH
CUMULATIVE NET MISMATCH
Medium Term Funding Ratio (MTF): Maximum Cumulative Outflow (MCO):
Trends %
CA 8 Days - 1-3 3 -12 1-5
2 - 7 Days
LL 1 month months months years
Demand Deposits withdrawal
Savings bank Deposits withdrawal
Letter of Credit/Guarantees (non-funded to funded)
Other OBS Items (non-funded to funded)
Signature
Name
Designation
Phone
# MTF = (Total Liabilities one year and above)(Total one year and above)
# MCO = (Total outflows up to one month and Total OBS up to one month)(Total Inflows+ Total Nostro a/c balance (Net) + Total available Fcy with BB)

Page 86 of 110
 AGRANI BANK LIMITED
TREASURY DIVISION
Head Office, Dhaka

MONTH-WISE INFLOW-OUTFLOW OF FOREIGN CURRENCY

1. For the Year ________ (Actual)
(Specimen)

Month Inflow Outflow Net

Purchase SWAP Sale SWAP flow
From From Buy/ Sale/ OD/ Overseas Export Total To To IB Buy/ Sale/ OD/ L/C s L/C s servic Total
BB IB Sale Buy TD Remittance Proceeds BB Sale Buy TD of other es
BPC than Paym
BPC ent/R
emitt
ance
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Total

Page 87 of 110
 AGRANI BANK LIMITED
TREASURY DIVISION
HEAD OFFICE, DHAKA
TREASURY PERFORMANCE ANALYSIS (LOCAL CURRENCY)
Year to
SL No. ITEMS Y1 Y2 Y3 Y4 Y5
Date
1 NET INCOME (2 - 3)
Amount
2 HEAD WISE INCOME
A. Bonds, Shares & Debentures
i. a) Sale of securities (Bills & Bonds)
b) Sale of shares
ii. BGTB (2 Years)
iii. BGTB (5 Years)
iv. BGTB (10 Years)
v. BGTB (15 Years)
vi. BGTB (20 Years)
vii. Govt. Securities (Others)
viii. Other Bonds
ix. Debentures
x. Dividend Warrant
xi. Others
Sub -Total
B. Treasury Bill
i. 30 days Bangladesh Bank Bill
ii. 91 days Bangladesh Bank Bill
iii. 28 days Treasury Bill
iv. 30 days Treasury Bill
v. 91 days Treasury Bill
vi. 182 days Treasury Bill
vii. 1 year Treasury Bill
viii. 364 days term Treasury Bill
ix. Reverse Repo (BB)
x. Inter Bank Repo
Sub -Total
C. Underwriting Comm.
D. Call Loan/Other Bank Deposit
i. Call Loan
ii. Other Bank Deposit (FDR)
Sub -Total
Grand Total
3 HEAD WISE EXPENDITURE
i. Revaluation Loss
ii. Interest paid to B. Bank (Repo)
iii. Interest paid to other Bank (Repo)
iv. Interest. on Coupon Bearing Bond (Repo)
v. Call Loan
vi. Interest on purchase of securities
vii. Exp. A/C loss on sale of securities
viii. Loss on Amortization on HTM securities
Sub -Total
4 NET INCOME {2(A+B+C+D) - 3}
5 Monthly Average

Page 88 of 110
 AGRANI BANK LIMITED
TREASURY DIVISION
Head Office, Dhaka

Calculation of Loanable Fund

(Figure in crore)

Fund Inflow Fund Outflow Application

s : Increase
(+)/Decreas
e (-)

Sources : Increase (+) /Decrease (-) Lending Cash in Balanc Govt. Other Acquisi Balance with BB Net Available
(Credit) tills e with Securiti Invest tions Nos Loan able
(Lcy+Fcy) Other es ment of tro Fund
Banks Fixed a/c
Assets Bal
Deposits Equity Specific anc
e
Excluding excluding Provisions
FC CLG Tk.
Overnight non-funded A/C Curr
ent 13=(1+2+3)-
Borrowing Revaluation A/C (4+5+6+7+8+
Reserves 9+10+11+12)

1 2 3 4 5 6 7 8 9 10 11 12 13

Page 89 of 110
 AGRANI BANK LIMITED
TREASURY DIVISION
Head Office, Dhaka
Net Stable Funding ratio (NSFR)
Position: as on --------
SL COMPONENTS : Amount (in thousand
Tk)
1 Regulatory Capital (Consolidated) :
2 Customer Deposit (Excluding Financial Institutions) :
a Current (including 10% savings)
b Savings (90%)
c Fixed (1 month or less)
d Fixed (more than 1 month to less than 1 year)
3 Deposit from financial institutions :
a Current
b Fixed (1 month or less)
c Fixed (more than 1 month to less than 1 year)
4 Liabilities with a remaining maturity of one year or more (excluding those mentioned in 2 and 3)
5 All other monetary liabilities (excluding those mentioned in 2, 3,4 above and amounts owed to financial institutions)
6 Amount owed to financial institutions
7 Residential Mortgages ,regardless of maturity, that qualify for the 50% RW under Basel II Standardized Approach
8 Loans to non-financial client other than natural persons or small businesses with a residual maturity of less than a
year
9 Other loans to non-financial clients with remaining maturity of one year or more, that qualify for the 50% RW under
Basel II Standardized Approach
10 Loans to natural persons or small businesses with a residual maturity of less than one year
11 All loans (excluding those mentioned from 7 to 10) and cost price of debt securities (excluding those issued by other
Fis) with a residual maturity of one year or more
12 Cost price of debt securities (excluding those issued by other Fis) with a residual maturity of less than one year
13 Undrawn portion of lines of credit (continuous loans)
14 Undrawn portion of lines of credit (term loans)
15 Amounts outstanding of commercial letters of credit (settlement date within the next 30 days)
16 Amounts outstanding of guarantees ,standby letter of credit, performance bonds, bid bonds, and similar instruments
17 Debt securities ,regardless of maturity ,issued by other financial institutions (cost price)
18 Fixed assets (Cost price)
19 Other investments :
a Non-traded equity securities (cost price)
b Mutual unit fund (cost price)
c Capital provided to own subsidiaries
d Publicly traded equity securities (cost price)
20 Loans to and deposits in other financial institutions in Bangladesh
21 Loans to and deposits in other financial institutions outside Bangladesh
22 Claims on Bangladesh Bank
23 Cash in hand (Lcy+Fcy)
24 All other assets not mentioned above

Page 90 of 110
 AGRANI BANK LIMITED
TREASURY DIVISION
Head Office, Dhaka
Liquidity Coverage ratio (LCR)
Position: as on----------------
SL # COMPONENTS : Amount (in thousand Tk)
1 Customer Deposit (Excluding Financial Institutions) :
Current (including 10% savings)
Savings (90%)
Fixed (1 month or less)
Fixed (more than 1 month)
2 Deposit from financial institutions :
Current
Fixed (1 month or less)
Fixed (more than 1 month)
3
4 Other borrowings and placement received
All other monetary liabilities issued by the bank that do not fit
5 into one of the above categories
6 Undrawn portion of lines of credit (continuous loans)
7 Undrawn portion of lines of credit (Term loans)
Amounts outstanding of commercial letters of credit
8 (Settlement date within the next 30 days)
Amounts outstanding of guarantees, standby letters of credit,
9 performance bonds ,bid bonds ,and similar instruments
10 All contractual cash outflows within the next 30 days
Loans to financial institutions, such as reverse repos, backed by
11 assets that are considered high -liquid
Loans to financial institutions backed by assets that are not
12 considered high -liquid
Principal and interest receivables, on performing Term Loans,
13 from all non-financial customers within the next 30 days
14 Cash on hand(Lcy+Fcy)
15 Balance with Bangladesh Bank :
a) Local Currency Total
Lien with BB as Capital
Lien with BB for other purposes
b) Foreign Currency Total
Lien with BB as Capital
Value of unencumbered eligible Govt. Securities in HTM
16 portfolio (T bill & T bond)
Value of securities marked as capital with BB
Value of other unencumbered eligible Govt. Securities in HTM
17 portfolio
Market Value of unencumbered eligible Govt. Securities in HFT
18 portfolio (T bill & T bond)
Market Value of securities acquired under Reverse repo

Page 91 of 110
 AGRANI BANK LIMITED
TREASURY DIVISION
Head Office, Dhaka

Short Term dynamic Liquidity

OUTFLOWS Next 1-7 Days 8-29 30-90

Day Days Days
1. Net increase in loans and advances
2. Net increase in investments:
-Approved securities
-Bonds/Debentures/Shares
-Others
3. Inter-bank Obligations
4. Off balance sheet items Repos, swaps, bills
discounted)
5. Others

A TOTAL OUTFLOWS

INFLOWS
1. Net cash position
2. Net increase in deposits(less CRR obligations)
3. Interest on investments
4. Interbank claims
5. Off balance sheet items (Reverse repos, swaps,
bills discounted etc.)
6. Others
B TOTAL INFLOWS

C MISMATCH (B-A)

D CUMULATIVE MISMATCH

E CAS OF TOTAL OUTFLOWS

Page 92 of 110
 Appendix-II: GLOSSARY OF FINANCIAL TERMS

Asset-liability management
The task of managing the funds of a financial institution to accomplish the two goals: (1) to earn an
adequate return on funds invested; and (2) to maintain a comfortable surplus of assets over
liabilities; also referred to as surplus management.

Arbitrage
The act of taking advantage of a state of imbalance between two or more markets, wherein a
combination of matching deals are struck to exploit the imbalance with the profit being the
difference between the market prices

At par
A price equal to the nominal or face value of a security

Bad debt
A debt that is deemed uncollectible or is written off

Balance sheet
Also called the statement of financial condition, is a summary of a company’s assets, liabilities and
owner’s equity.

Bank for International Settlements (BIS)

An international bank headquartered in Basel, Switzerland, which serves as a forum for monetary
cooperation among several European central banks, the Bank of Japan, and the U.S. Federal
Reserve System. Founded in 1930 to handle the German payment of World War I reparations, it
now monitors and collects data on international banking activity and promulgates rules concerning
international bank regulation.

Base rate
Interest rate charged by banks to their best corporate customers in Great Britain; it is the British
equivalent of the prime rate in the United States.

Basis point
In the bond market, the smallest measure used for quoting yields is a basis point. Each percentage
point of yield equals 100 basis points. Basis points are also used for interest rates. A bond’s yield
that increases from 7.00% to 7.50% would be said to have risen 50 basis points.

Blue-chip Company
Used in the context of general equities, it refers to a large and credit-worthy enterprise that has a
long record of profit growth and dividend payment, and a reputation for quality management and
wide acceptance of its products or services as well as its ability to make money and pay dividends.
A blue chip stock is typically high-priced and has moderate dividend yields.

Page 93 of 110
Bond
Any interest-bearing or discounted government or corporate security that obligates the issuer to
pay the bondholder a specified sum of money, usually at specific intervals, and to repay the
principal amount of the loan at maturity. When an investor buys bonds, he or she is lending money.
Bondholders have an I.O.U. from the issuer but no corporate ownership privileges as stockholders
do.

Bond discount
This is the amount by which the market price of a bond is lower than its face value. When opposite
conditions exist and the market price is higher than face value, the difference is termed a bond
premium.
Capital market
The market for trading long-term debt instruments, i.e., those that mature in more than one year
57

Central bank
A country’s main bank whose responsibilities include: the issue of currency; the administration of
monetary policy including open market operations; holds deposits representing the reserves of
other banks; and engages in transactions designed to facilitate the conduct of business and protect
the public interest. In the U.S., central banking is a function of the Federal Reserve System.

Certificate of deposit (CD)

Also known as a time deposit, this is a certificate issued by a bank that indicates a specified sum of
money has been deposited. A CD has a maturity date and a specified interest rate, and can be
issued in any denomination. Maturities range from a few weeks to several years. Interest rates are
set by competitive forces in the market place.

Commercial loan
A short-term (typically 90 days) renewable loan used by a company to finance seasonal working
capital needs, such as purchase of inventory or production and distribution of goods.

Common stock
This refers to securities that represent equity ownership in a company. Common shares let an
investor vote on such matters as the election of directors. They also give the holder a share in the
company’s profits via dividend payments or the capital appreciation of the security. These units of
ownership of a public corporation have a junior status to the claims of secured/unsecured
creditors, bondholders and preferred shareholders in the event of liquidation.

Consumer Price Index (CPI)

This is a measure of prices of a fixed basket of goods bought by a typical consumer, including food,
transportation, shelter, utilities, clothing, medical care, entertainment and other items.

Cost of capital
This refers to the required rate of return that a business could earn if it chose another investment
with equivalent risk – in other words, the opportunity cost of funds employed as a result of an
investment decision. Cost of capital is also calculated using s weighted average of a firm’s cost of
debt and classes of equity.

Page 94 of 110
Coupon bond
A bond featuring coupons that must be presented to the issuer in order to receive interest
payments

Coupon rate
In bonds, notes, or other fixed income securities, this is the stated percentage rate of interest
usually paid periodically in a year

Credit rating
Formal evaluation of an individual (or company’s) credit history and capability of repaying loans and
other obligations.

Credit risk
This is the risk that an issuer of debt securities or a borrower may default on its obligations, or that
the payment may not be made on a negotiable instrument

Debt-equity ratio
This is an indicator of financial leverage, which compares assets provided by creditors to assets
provided by shareholders.

Debt ratio
Total debt divided by total assets

Debt securities
Security representing money borrowed that must be repaid, and having a fixed amount, a specific
maturity or maturities, and usually a specific rate of interest or an original purchase discount.
Examples are bills, bonds, and commercial paper.

Dilution
This refers to the effect on earnings per share (EPS) and book value per share, if all convertible
securities were converted, or all warrants or stock options were exercised.

Discount bond
Debt sold for less than its principal value; if a discount bond pays no coupon, it is called a zero
coupon bond.

Discount yield
The yield or annual interest rate on a security sold to an investor at a discount. A bond that is sold
at $4875 that matures to $5000 has a discount of $125. To calculate the discount yield: <discount
divided by the face value of the security> multiplied by <the number of days in the year divided by
the number of days to maturity>.

Discounted cash flow (DCF)

Future cash flows multiplied by discount factors to obtain present values

Page 95 of 110
Discounting
Calculating the present value of a future amount, discounting is the opposite of compounding.

Dividend
A portion of a company’s profit paid to common and preferred shareholders. A stock selling for $40
a share with an annual dividend of $2 yields the investor 5%.

Dividend payout ratio

Percentage of earnings paid out as dividends. In general, the higher the payout ratio, the more
mature the company. In western economies, electric and telephone utilities tend to have the
highest payout ratios, whereas fast-growing companies usually reinvest all earnings and pay no
dividends.

Dividend policy
Standards by which a firm determines the amount of money it will pay as dividends

Dividend yield (stocks)

Indicated yield which represents annual dividends divided by the current stock price

DuPont system of financial control

The expression of return on assets (RoA) in terms of profit margin and asset turnover

Duration
A common gauge of price sensitivity of a fixed income asset or portfolio to a change in interest
rates

Earnings per share (EPS)

This is an indicator of profitability, where a company’s profit is divided by its number of outstanding
shares. If a company earning $2 million in one year had 2 million share of stock outstanding, EPS
would be $1 per share. Note: company’s usually use a weighted average number of shares
outstanding over the reporting term, especially if it issues new stocks during the period.

Earnings yield
This is the ratio of earnings per share, after allowing for tax and interest payments on fixed interest
debt, to the current share price. This is the inverse of the price-earnings ratio, it is the total 12-
months earnings divided by the number of outstanding shares, divided by the recent price
multiplied by 100. The end result is shown in percentage terms. This ratio is used because it avoids
the problem of zero earnings in the denominator of the price-earnings ratio.

Economic assumptions
General market environment parameters a firm expects to operate in over the life of a financial
plan

Economic growth rate

The annual percent rate of change in the gross national product (GNP)

Page 96 of 110
Economic income
Cash flow plus change in present value

Economic indicators
The key statistics of the economy that reveal the direction the economy is headed; for example, the
unemployment rate and the inflation rate

Equity
Ownership interest in a firm. Also, the residual monetary value of a futures trading account,
assuming its liquidation is at the going trade price. In real estate, this is the monetary difference
between what properties could be sold for and debt claimed against it. In a brokerage account,
equity equals the value of the account’s securities minus any debit balance in a margin account.
Equity is also the shorthand for stock market investments.

European Central Bank (ECB)

The bank created to monitor the monetary policy of the 12 countries that have converted to the
Euro from their local currencies, namely: Austria, Belgium, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

Financial leverage
The use of debt to increase the expected return on equity, measured by the ratio of debt to debt
plus equity

Financial leverage ratios

Common ratios are debt divided by equity, debt divided by the sum of debt plus equity. Related:
capitalization ratios

Gearing
Financial leverage

Government securities (GS)

Negotiable securities, e.g., treasury bills, bonds and notes, and savings bonds issued by
government, which are considered among the safest instruments available as they are backed by
the government

Gross Domestic Product (GDP)

The market value of goods and services produced by labor and property over time, GDP is made up
of consumer and government purchases, private domestic investments, and net exports of goods
and services.

Hedge/hedging
A strategy to reduce the risk of an investment. A perfect hedge is one eliminating the possibility of
future gain or loss.

Page 97 of 110
Index
Statistical composite that measures changes in the economy or in financial markets, often
expressed in percentage changes from a base year or from the previous period. Indices measure
the ups and downs of stock, bond, and some commodities markets, in terms of prices and
weighting of companies in the index

Inflation
The rate at which the general level of prices for goods and services is rising

Interbank rate
(See LIBOR)

Interest
The price paid for borrowing money. It is expressed as a percentage rate over a period of time and
reflects the rate of exchange of present consumption for future consumption; also the share or title
in property.

Interest rate risk

The chance that a security’s value will change due to a change in interest rates (for example, a
bond’s price drops as interest rates rise). For a depository institution, this is also called a funding
risk, i.e., the risk that spread income will suffer because of a change in interest rates.

Interest rate swap

This is a binding agreement between counterparties to exchange periodic interest payment on
some predetermined principal amount, which is called the notional principal. For example, one
party will pay fixed and receive variable.

Inverted yield curve

When short-term interest rates are higher than long-term rates, this is the anti-thesis of a positive
yield curve.

Investment bank
A financial intermediary that will perform a variety of services, including aiding in the sale of
securities, facilitating mergers and other corporate reorganizations, acting as brokers to both
individual and institutional clients, and trading for their own accounts.

Lender of last resort

Characterization of a central bank’s role in bolstering a bank that faces large withdrawals of funds,
thereby maintaining the stability of the banking system which could be threatened if major banks
were to fail.

Page 98 of 110
Letter of credit (L/C)
A form of guarantee of payment issued by a bank on behalf of a borrower

Leverage
This commonly refers the use of debt financing. In investment banking, this may refer to any
property of rising or falling prices at a proportionally greater amount than comparable investments;
for example, an option is said to have high leverage compared to the underlying stock because a
given price change in the stock may result in a greater increase or decrease in the value of the
option.

Leverage ratios
Measures the relative value of stockholders, capitalization and creditors obligations, and of a firm’s
ability to pay financing charges; also, the value of a firm’s debt to the total value of the firm (debt
plus stockholder capitalization).

Liability swap
An interest rate swap used to alter the cash flow characteristics of an institution’s liabilities, so as to
provide a better match with its assets

Line of credit (LOC)

An informal or formal arrangement between a bank and a customer, allowing the customer to
borrow up to a specified maximum during a specified period, usually one year

Liquidity
A high level of trading activity, allowing buying and selling with minimum price disturbance; also, a
market characterized by the ability to buy and sell with relative ease

Liquidity ratios
Ratios that measure a firm’s ability to meet its short-term financial obligations on time, such as the
ratios of current assets to current liabilities

London Interbank Offered Rate (LIBOR)

This is the rate of interest that major international banks in London charge each other for
borrowings.
Many variable interest rates in the U.S. are based on spreads off LIBOR. By contrast with the bid
rate LIBID quoted by banks seeking such deposits.

Macroeconomics
Analysis of a country’s economy as a whole

Mark-to-market
Adjustment of the book value or collateral value of a security to reflect current market value

Market-book ratio
Market price of a share divided by its book value per share

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Market capitalization
A measure of corporate size, this is the total value of all outstanding shares, computed as shares
times’ current market price.
Market value
(a) The price at which a security is trading and could presumably be purchased or sold; or
(b) What investors believe a firm is worth, calculated by multiplying the number of shares
outstanding by the current market price.

Maturity
For a bond, the date on which the principal is required to be repaid; in an interest rate swap, the
date that the swap stops accruing interest.

Merchant bank
A British term for a bank that specializes not in lending its own funds but in providing various
financial services such as accepting bills arising out of trade, underwriting new issues, and providing
advice on acquisitions, mergers, foreign exchange, or portfolio management

Microeconomics
Analysis of the behavior of individual economic units such as companies, industries, or households

Monetary policy
Actions taken by the Board of Governors of the Federal Reserve System, the European Central Bank
and the Bank of England, to influence the money supply or interest rates

Money supply
MI-A - Currency plus demand deposits
MI-B - MI-A plus cheque-able deposits
M2 - MI-B plus overnight repos, money market funds, savings and small (less than ($100) time
deposits
M3 - M-2 plus large time deposits and term repos
L - M-3 plus other liquid assets

Mortgage
A loan secured by the collateral of some specified real estate property that obliges the borrower to
make a predetermined series of payments

Mortgage-backed securities (MBS)

Investment instruments backed by a pool of mortgage loans

Mortgage rate
The interest rate on a mortgage loan

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Negative yield curve
When the yield on a short-term security is higher than the yield on a long-term security, partially
because high interest rates are creating greater demand for short-term borrowing

Negotiated certificate of deposit

A large-denomination CD, generally $100 million or more, that can be sold but cannot be cashed in
before maturity

Net income
A company’s total earnings, reflecting revenues adjusted for costs of doing business, depreciation,
interest, taxes and other expenses

Net present value (NPV)

The present value of expected future cash flows minus the cost

Net worth
Common stockholders’ equity which consists of common stock, surplus and retained earnings

Nominal interest rate

The interest rate unadjusted for inflation

Nominal yield
The income received from a fixed income security in one year divided by its par value. See also:
Coupon rate

Non-performing asset
An asset that is not effectively producing income, such as an overdue loan

Notes to financial statements

A detailed set of notes immediately following the financial statements in an annual report that
explains and expands on the information in the financial statements

NSFR
LCR or Liquidity Coverage Ratio is a new liquidity standard introduced by the BCBS (Basel
Committee for Banking Supervision). This standard is built on the methodologies of traditional
liquidity coverage ratio used by banks to assess exposure to contingent liquidity events. The
minimum acceptable value of this ratio is 100 percent.

Obligor
A person or party who has an obligation to pay off a debt

Off-balance sheet financing

Financing that is not shown as a liability on a company’s balance sheet

Open repo
A repurchase agreement with no definite repayment term, made on a day-to-day basis, and either
the borrower or the lender may choose to terminate. The rate paid is higher than on an overnight

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 repo and is subject to adjustment if rates move.

Ordinary shares
Apply mainly to international equities. Shares of non-U.S. companies traded in their individual
home markets usually cannot be delivered in the U.S.

Overnight repo
A repurchase agreement with a term of one day
Par
Equal to the nominal or face value of a security; or a bond selling at part is worth an amount
equivalent to its original issue value or its value upon redemption at maturity

Par bond
A bond trading at its face value

Par value
Also called the maturity value or face value; the amount that an issuer agrees to pay at the maturity
date

Parallel shift in the yield curve

A shift in economic conditions in which the change in the interest rate on all maturities is the name
number of basis points; In other words, if the 3-month T-Bill increases 100 basis points (1%), then
the 6- month, 1-year, 5-year, 10-year, 20-year, and 30-year rates all increase by 100 basis points as
well

Payout ratio
Generally, the proportion of earnings paid out to the common stockholders as cash dividends;
more specifically, the firm’s cash dividend divided by the firm’s earnings in the same reporting
period.

Peak
The high point at the end of an economic expansion until the start of a contraction

Portfolio
A collection of investments, real and/or financial

Positive yield curve

When long-term debt interest rates are higher than short-term debt rates (because of the
increased risk involved with long-term debt securities)

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Present value (PV)
The amount of cash today that is equivalent in value to a payment, or to a stream of payments, to
be received in the future; to determine the PV, each future cash flow is multiplied by a present
value factor. For example, if the opportunity cost of funds is 10%, the present value of $100 to be
received in one year is $100 x [1 / (1 + 0.10)] = $91.

Present value factor

Factor used to calculate an estimate of the present value of an amount to be received in a future
period. If the opportunity cost of funds is 10% over the next year, the factor is [1 / (1 + 0.10)].

Present value of growth opportunities

Net present value (NPV) of investment a firm is expected to make in the future

Price-book ratio
Compares a stock’s market value to the value of total assets less total liabilities (book value);
determined by dividing current stock price by common stockholder equity per share, adjusted for
stock splits. Also called Market-to-Book

Price/Earnings ratio (PE ratio)

Current stock price divided by trailing annual earnings per share or expected annual earnings per
share. Assume XYZ Co. sells for $25.50 per share and has earned $2.55 per share this year; $25.50 =
10 times $2.55. XYZ stock therefore sells for 10 x earnings. The PE ratio, known as the multiple,
gives investors an idea of how much money they are paying for a company’s earning power. The
higher the PE, the more investors are paying, and therefore the more earnings growth they are
expecting. High PE stocks – those with multiples over 20, for example – are typically young, fast-
growing companies. They are far riskier to trade than low PE stocks, since it is easier to miss high
growth expectations than low-growth predictions. Low PE stock tend to be in low growth or mature
industries, in stock groups that have fallen out of favor, or in old, established, blue-chip companies
with long records of earnings stability and regular dividends. In general, low PE stocks have higher
yields than high PE stocks, which often pay no dividends as all.

Prime rate
The interest rate at which bank lend to their best (prime) customers; more often than not, a bank’s
most creditworthy customers borrow at rates below the prime rate.

Rate of interest
The rate, as a proportion of the principal, at which interest is computed

Rate of return
Calculate as the <value now> minus <value at time of purchase> divided by the <value at the time
of purchase>. For equities, dividends are often included with the value now.

Ratings
An evaluation of the credit quality of a company’s debt issue by Moody’s, S&P, and Fitch Investors
Service; investors and analysts use ratings to assess the riskiness of an investment.

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Ratio analysis
A way of expressing relationships between a firm’s accounting numbers and their trends over time
that analysts use to establish values and evaluate risks

Real interest rate

The rate of interest excluding the effect of expected inflation i.e., the rate that is earned in terms of
constant-purchasing-power. Also the interest rate expressed in terms of real goods, i.e., nominal
interest rate adjusted for expected inflation

Realized profit (or loss)

A capital gain or loss on securities held in a portfolio that has become actual by the sale or other
type of surrender of one or many securities

Real rate of return

The percentage return on some investments that has been adjusted for inflation

Redemption date
The date on which a bond matures or is redeemed

Reference rate
A benchmark interest rate (such as LIBOR) used to specify conditions of an interest rate swap or an
interest rate agreement

Repo
This refers to an agreement in which one party sells a security to another party and agrees to
repurchase it on a specified date for a specified price. See also: repurchase agreement

Required return
The minimum expected return one would need in order to purchase an asset, i.e., to make an
investment

Retail credit
Credit granted by a firm to consumers for the purchase of goods or services

Retained earnings
Accounting earnings that are retained by a firms for reinvestment in its operations; earnings that
are not paid out as dividends

Return on assets (RoA)

This is an indicator of profitability, determined by dividing net income for the past 12 months by
total average assets. RoA, a percentage, can be decomposed into return on sales (net
income/sales) multiplied by asset utilization (sales/assets).

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Return on equity (RoE)
An indicator of profitability, determined by dividing net income for the past 12 months by common
stockholder equity; also used as a measure of how a company is suing its money. RoE may be
decomposed into return on assets (RoA) multiplied by financial leverage (total assets/total equity).

Return on investment (RoI)

Generally, book income as a proportion of net book value

Reverse repo
In essence, this refers to a repurchase agreement. From the customer’s perspective, the customer
provides a collateralized loan to the seller.

Revolving line of credit (LOC)

A bank line of credit on which the customer pays a commitment fee and can take and repay funds
at will. Normally, a revolving LOC involves a firm commitment from the bank for a period of several
years.

Riding the Yield Curve

Buying long-term bonds, I anticipation of capital gains as yields fall with the declining maturity of
the bonds

Risk
Often defined as the standard deviation of the return on total investment, or the degree of
uncertainty of return on an asset

Risk-averse
Describes an investor who, when faced with two investments with the same expected return but
different risks, prefers the one with the lower risk

Risk-based capital ratio

This is a bank requirement that there be a minimum ratio of estimated total capital to estimated
risk weighted assets.

Risk-free rate of return

The rate earned on a risk-free asset (e.g., T-bill)

Risk management
The process of identifying and evaluating risks, and selecting and managing techniques to adapt to
risk exposures

Risk premium
The reward for holding the risky equity market portfolio rather than the risk-free asset; the spread
between Treasury and non-Treasury bonds of comparable maturity

Risk-return trade-off
The basic concept that higher expected returns accompany greater risk, and vice versa

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Risk-adjusted return
Return earned on an asset normalized for the amount of risk associated with that asset

Risk-free asset
An asset whose future normal return is known today with certainty, the risk-free asset is commonly
defined as short-term obligations of the government

Savings deposits
Accounts that pay interest, typically at below-market interest rates, that do not have a specific
maturity and that usually can be withdrawn upon demand
Secondary market
This is the market in which securities are traded after they are initially offered in the primary
market. Most trading occurs in the secondary market. The New York Stock Exchange, as well as all
other stock exchanges and the bond markets, are secondary markets. Seasoned securities are
traded in the secondary market.
Securitization
The act of creating a more-or-less standard investment instrument, such as a mortgage pass-
through security, by pooling assets to back the instrument; also refers to the replacement of non-
marketable loans and/or cash flows provided by financial intermediaries with negotiable securities
issued in the public capital markets

Shareholder’s equity
This is a company’s total assets minus total liabilities; also known as net worth
Short-term
Any investment with a maturity of one year or less

Soft landing
A term describing a growth rate high enough to keep the economy out of recession, but also low
enough to prevent high inflation and interest rates

Sovereign risk
The risk that a central bank will impose foreign exchange regulations that will reduce or negate the
value of foreign exchange contracts; also refs to the risk of government default on a loan made to a
country to guaranteed by it
Spot interest rates
Interest rates fixed today on a loan that is made today
Spot rate
The theoretical yield on a zero-coupon Treasury security
Spread income
Also called margin income, this is the difference between income and cost. For a depository institution,
this is the difference between the assets it invests in (loans and securities) and the cost of its funds
(deposits and other sources)

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Stakeholders
All parties that have an interest (financial or otherwise) in a firm – stockholders, creditors,
bondholders, employees, customers, management, the community and the government

Standard deviation
The square root of the variance; a measure of dispersion of a set of data from its mean

Steepening of the yield curve

A change in the yield curve, where the spread between the yield on a long-term and short-term
Treasury has increased; it can also be compared to flattening of the yield curve

Subordinated debt
Debt over which senior debt takes priority; in the event of bankruptcy, subordinated debt holders
receive payment only after all senior debt claims are paid in full

Sustainable growth rate

Maximum rate of growth a firm can sustain without increasing financial leverage

Swap
An agreement in which two entities lend to each other on different terms, e.g., in different
currencies, and/or at different interest rates (e.g., fixed and floating)

Term structure of interest rates

Relationship between interest rates on bonds of different maturities, usually depicted in the form
of a graph often called a yield curve.

Time value of money

The concept that money today is worth more than in the future, because money received today
can earn interest up until the time the future money is received.

Total debt-to-equity ratio

A capitalization ratio comparing current liabilities plus long-term debt to shareholder’s equity

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Treasury
Internationally, the U.S. Department of the Treasury which issues all Treasury bonds, notes and
bills, as well overseeing agencies; also, the department within a company/bank that oversees its
financial operations including the issuance of new shares

Treasury bills
Debt obligations of a government’s treasury, that have maturities of one year or less (i.e., 91, 182,
182 days or 52 weeks)

Treasury bonds
Debt obligations of a government’s treasury, that have maturities longer than 1 year and can be up
to 10 years or more

Underwrite
To bring securities to the market; or to guarantee (as to guarantee the issuer of securities a
specified price by entering into purchase and sale agreement)

Underwriter
A firm, usually an investment bank, which buys an issue of securities from a company and resells it
to investors; or in general, a party that guarantees the proceeds to the firm from a security sale,
thereby in effect taking ownership of the securities

Underwriting
Acting as the underwrite in the issue of new securities for a firm

Underwriting fee
The portion of the gross underwriting spread that compensates the securities firm for its services in
underwriting a public offering

Underwriting syndicate
A group of investment banks that work together to sell new security offerings to investors; the
underwriting syndicate is led by the lead underwriter

Unmatched book
If the average maturity of a bank’s liabilities is shorter than that of its assets, it is said to be running
an unmatched book. The term is commonly used with the Euro-market. It also refers to entering
into over the- counter (OTC) derivative contracts and not hedging by making trades in the opposite
direction to another financial intermediary; in this case, the firm with an unmatched book usually
hedges its net market risk with futures and options.

U.S. Treasury bill

U.S. government debt with a maturity of less than a year

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U.S. Treasury bond
U.S. government debt with a maturity of more than 10 years

U.S. Treasury note

U.S. government debt with a maturity of 1 to 10 years

Variable-rate loan
Loan made at an interest rate that fluctuates depending on a base interest rate, such as the prime
rate or LIBOR

Weighted average cost of capital (WACC)

Expected return on a portfolio of all a firm’s securities, sued as a hurdle rate for capital investment.
Often the weighted average of the cost of equity and the cost of debt; the weights are determined
by the relative proportions of equity and debt in a firm’s capital structure.

Yield
The percentage rate of return paid on a stock in the form of dividends, or the effective rate of
interest paid on a bond or note

Yield curve
This is the graphic depiction of the relationship between the yield on bonds of the same credit
quality but different maturities; also known as the term structure of interest rates. The yield curve
can accurately forecast the turning points of the business cycle.

Yield curve strategies

Investments that position a portfolio to capitalize on expected changes in the shape of the Treasury
yield curve

Yield to maturity (YTM)

The percentage rate of return paid on a bond, note or other fixed income security if the investor
buys and holds it to its maturity date. The calculation for YTM is based on the coupon rate, length
of time to maturity, and market price. It assumes that coupon interest paid over the life of the bond
will be reinvested at the same rate.

Zero-coupon bond
A zero-coupon bond, also known as an "accrual bond," is a debt security that doesn't pay interest (a
coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed
for its full face value.

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References:

 https://www.bb.org.bd
 https://www.agranibank.org
 https://www.investopedia.com
 https://www.bloomberg.com
 https://www.wikipedia.org
 Baron's Dictionary of Finance and Investment Terms, V Edition

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