Factura de Venta

Identifying elements of ALM frameworks at banks requires studying the structure of the banking system as well as the policies and procedures used to set banks’ strategies to manage both sides of the balance sheet. Researchers have tried to identify the main elements of the ALM framework within the context of the banking industry. In addition, they have sought to emphasise the importance of the ALCO as the implementation arm of ALM strategies and policies in order to mitigate against various risks including fundamental risks and to maximise their operating income. ALM has garnered increasing attention over the past few decades due to the crucial role of banks in the stability of the financial system.

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3.4.1 Asset Liability Management

The concept of the ALM was settled as strategy for a hedging reaction against the risk of financial institutions (Zawalinska, 1999). In addition, ALM is a comprehensive strategy that is based on assessment and managing banking institutions effectively to achieve their targets while mitigating against banks’ exposure to various risks (Choudhry, 2011). Moreover, ALM is a vital issue for banks’ strategic planning, assessment and management of endogenous financial operations and external risks (Tektas, et al., 2005).

ALM frameworks work to maximise profitability while mitigating against the effects of risk factors (Bessis, 2011). An ALM framework should be compatible with a bank’s overall strategy (Charumathi, 2008). Further, any goals set for the ALM should be clear and take into account various types of risks that affect banking operations, which could be mitigated against through setting risk exposure limits and using various risk-mitigation tools (Zawalinska, 1999). Contingency funding plans are also useful in this regard, as are periodic stress tests.

The risks stemming from banking operations involve lending and trading activities (Chorafas, 2007; Choudhry, 2011) and ensuring the availability of funding to meet expected and unexpected future obligations. This can be done by broadening a bank’s funding sources and ensuring that it has adequate reserve buffers to cushion any liquidity shortfalls. In addition, ALM strategies and policies should be reviewed periodically through comparing actual performance with projections (BIS, 2008; Vento & La Ganga, 2009; Drehmann, 2013). Nevertheless, the developments in liquidity management supervision set by the Basel committee have increased the regulatory burden for banks. Although ALM was identified in the Basel II pillars, Basel III introduced new management standards to strengthen internal and

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regulatory supervision over liquidity management in the banking industry (Kubat, 2014). Furthermore, regulatory authorities are paying more attention to the ALM process.

Based on the aforementioned definition, the research main hypothesis is as follows:

Hypothesis (1): Jordanian commercial banks have an effective ALM framework

3.4.1.1 Asset Liability Committee

The implementation arm of an ALM framework, the ALCO, is key to managing the ALM process and charting strategies and policies for individual business lines as well as a bank’s overall strategy. It does this by analysing the bank’s lending margin, interest income, variance from last projections, customer business and future business by assessing projected returns, revenue and risk exposure (Choudhry, 2018). The ALCO also considers acceptable risk exposure levels, existing risk limits, and hedging policies.

The ALCO is dependent on reports from various units in the bank. Many ALM desks formulate their hedging strategy within the overall context of funding and liquidity policy. In addition, they also carry out scenario planning under micro and macro level market conditions and the latest short-term projections and evaluate selected strategies by compared targets with actual achievements (Bessis, 2011; Choudhry, 2012). Furthermore, the ALCO members meet on a regular basis to discuss recent developments in the bank’s supported business lines and changes in the surrounding environment (Choudhry, 2018). The ALCO also provides comprehensive information to the board of the bank regarding the risks being run (ADB, 2009). Based on the aforementioned definition, the first sub-hypothesis is as follows:

Hypothesis (1:1): ALCO is effectively involved in implementing ALM strategies and policies in Jordanian commercial banks.

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Therefore, the independence of an ALCO in managing various risks is a matter of operational safety (IFC, 2012). Their focus should not only be directed to liquidity and interest rate risk; rather they should have a broader view of the risks stemming from the business environment as well as the risks stemming from their own banking operations (Bessis, 2011; Choudhry, 2012). In addition, regulatory authorities may influence the output of the ALCO report through its legislative powers in supervising the banking sector (IFC, 2008).

3.4.1.2 Liquidity Risk Management

The inability to control surrounding environmental factors and their impact on business lines has compelled banking institutions to set up strategies and policies to mitigate against the impact of these shocks and benefit from existing opportunities (Choudhry, 2011) and to manage the liquidity risk that arises from maturity mismatches across assets and liabilities. It requires an understanding of a bank’s day-to-day liquidity needs (Bessis, 2015). Commercial banks’ strategies to effectively manage asset-liability components require a focus on various pillars. The first pillar is concerned with managing banks’ liquidity positions; and the second pillar focuses on the risks stemming from day-to-day operations (Choudhry, 2011). Appropriate liquidity risk management has to be consistent with a bank’s overall strategy and attention must be paid to daily liquidity operations.

Based on the aforementioned definition, the second sub-hypothesis is as follows:

Hypothesis (1:2): Liquidity risk management in Jordanian commercial banks is consistent with the overall strategy of the bank and considers operational liquidity needs.

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3.4.1.3 Contingency Funding Plans

Contingency plans evaluate liquidity situations in terms of banks’ capacity to produce cash flow to fulfil their debt commitments and deposit withdrawals, or margin calls on collateral when market conditions become severe (Bessis, 2015) . In addition, the CFP consist of policies, strategies, and procedures that serve as a scheme for a bank to address liquidity shortages in emergencies (BIS, 2008). Furthermore, the CFB aims to ensure that banks can manage liquidity fluctuations in short term or long term prudently and efficiently, and mitigate against urgent liquidity needs (Ismal, 2013). Moreover, the CFP provides a comprehensive assessment of banks’ liquidity strengths and weaknesses, which supplements ongoing balance sheet monitoring and provides risk-mitigation knowledge that management can use to protect the bank in emergency situations and in its day-to-day activities (Bryant, 2013).

Effective CFPs provide alternative sources of funds and include procedures when shortfalls are encountered (DICO, 2018).

Based on the aforementioned definition, the third sub-hypothesis is as follows:

Hypothesis (1:3): Contingency Funding Plans in Jordanian commercial banks focus on liquidity positions.

3.4.1.4 Stress-Testing

Stress-testing is a vital risk management tool and has become part of banks’ internal risk management processes (Basel Committee on Banking Supervision, 2009). In addition, authorities can employ stress testing as a regulatory measure to quantify the impact of negative shocks on banks’ capital and liquidity positions (Anand, et al., 2014). Stress testing begins with specific hypothetical scenarios, which tend to incorporate economic and financial market

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variables that might be expected to have an adverse impact on banks. Different techniques are used to estimate the impact of the scenario(s) on banks’ profits and balance sheets (Dent, et al., 2016).

In addition, the banks’ stress test together is more rigorous than the authority’s stress testing expectations which cover all the banking aspects. Furthermore, the most prevalent source of bank stress-test scenarios are historical conditions and expert judgements, followed by the use of supervisory scenarios and statistical methods (BIS, 2012). Most banks review their stress-testing framework at least every two years, while most banks review it annually (BIS, 2012). Therefore, the stress test aims to measure and understand the ability of banks’ to maintain a sufficient buffer to stay afloat under extreme scenarios (Iyer & Sahu, 2018). Based on the aforementioned definition, the fourth sub-hypothesis is as follows:

Hypothesis (1:4): Stress testing scenarios in Jordanian commercial banks are efficient in terms of liquidity management.

In research survey, the researcher employed various data-collection techniques, namely open-ended questions, closed-ended question, and a Likert-scale in order to have a broader view of the structure of ALM in Jordanian commercial banks. The next section will discuss the methodology and research design used in this research.