|
Asset and Liability Management Asset and liability management within the Bank rests with an asset liability management committee (“ALMC”) which reports to the Management Board. ALMC meets monthly to review a report comprising the latest figures and projections for the profit and loss account, balance sheet, liquidity and interest rate exposure, foreign exchange risk exposure, credit risk exposure and capital adequacy. ALMC’s objective is to maximise the Bank’s return on assets and equity while maintaining an acceptable level of exposure to liquidity risk, interest rate risk, foreign exchange risk and credit risk. Liquidity Risk The Bank has enjoyed a stable funding base, with a large portion of its liabilities as customer deposits (approximately 76.7 per cent of total liabilities). Of those deposits, 72.2 per cent were demand deposits and 27.8 per cent were time deposits and saving deposits. The Bank currently manages its liquidity risk mainly through its assets, a high percentage of which is held in short-term deposits, REPO agreements and liquid securities.
The percentage of liquid assets gives the Bank sufficient liquidity. The Bank has been well able to meet the Bank of Estonia’s prudence ratio “Liquidity II” (minimum requirement 35 per cent), with a ratio of 45.96 per cent at 30th June, 1997. Interest Rate Risk The Bank monitors its interest rate exposure by means of a maturity and cumulative interest rate gap analysis between the Bank’s interest sensitive assets and liabilities. As of 30th June, 1997, the Bank’s one year cumulative gap amounted to 18.47 per cent of total assets. Information on the Bank’s gap of interest sensitive assets and liabilities as of 30th June, 1997 is provided in the table below:
Foreign Exchange Risk The Bank of Estonia has imposed an excess capital requirement on net open foreign exchange positions exceeding 2 per cent of a credit institutions’ total equity; among single currencies, restrictions have been imposed on net open positions in Latvian lats, Lithuanian litas (both up to 10 per cent of the equity) and other currencies of the B-zone countries (up to 5 per cent of the equity). In addition to the Bank of Estonia’s requirements, ALMC has established internal limits on the maximum allowed aggregate net open foreign exchange position (calculated at the beginning of each month based on the Bank’s capital adequacy ratio at the end of the preceding month) and on net open foreign exchange positions of the A-zone currencies (with the exception of the German Mark). Furthermore, ALMC has established stop-loss limits at which the open foreign exchange positions have to be closed and the loss realised. All limits pertaining to the foreign exchange risk management are controlled daily. Credit Risk In assessing the credit risk of financial institutions, the Bank is following a conservative line. Limits for interbank lending have been assigned to six commercial banks in Estonia and are limited to one year. Credit limits concerning the forward and swap transactions have been extended to the same banks and are limited to five years. All credit limits are reviewed monthly. Market Risk In neighbouring countries the Bank has, in addition to governments bonds invested also into municipal bonds. Investments in Latvian, Lithuanian, and Russian bonds decreased by 1.6 times during the first half of 1997. At the same time, the Bank increased its equity holdings in these countries by 1.4 times during the period. Capital Adequacy The Supervisory Board has established that the Bank’s capital adequacy ratio (the ratio of equity to the total risk-weighted assets and off-balance sheet liabilities and net open foreign exchange positions in excess of 2 per cent of the equity) shall be maintained between 11.5 and 12.5 per cent. At the end of 1996, the Bank’s ratio was 12.60 per cent. From 1st October, 1997 the requirement of the Estonian Central Bank is to keep the capital adequacy ratio above 10 per cent. Until that date, a ratio of 8 per sent was required. |