Managing Exposure for a Dubai Private Bank

Private banking has a long tradition in the international financial world. In Switzerland, private banks have existed since the Revocation of the Edict of Nantes in 1685. The UK concern C. Hoare & Co. has been a viable business since 1672. Modern investors often look to a Dubai private bank to take advantage of this unique financial storage system.

Private Bank Dynamics

Private banks are owned by either an individual or by general partners in a cadre with limited partners. Because private banks are not incorporated, creditors have full rights against the “entirety of the bank’s assets” as well as the entirety of the owners’ assets. Recent increased growth in the private banking industry has resulted in increased participation by those looking to take advantage of this lucrative dynamic. According to a Euromoney report in 2008, global private banking assets rose to USD 7.6 trillion in 2008 from USD 3.3 trillion in 2007.

Exposure Managementindex

Any successful private banking strategy must include a sophisticated risk management system. One of the newest exposure management mechanisms is called the asset liability management (ALS) system. This system refers to the modification of the portfolio management process in order to keep holdings in line with future constraints and financial objectives. ALM has been used extensively and successfully by institutional asset managers, and is now being adapted for use in private banking. Private bankers have a unique perspective of managing their clients’ investment risk, and a study of the ALM adoption process is useful to understanding their disposition toward a new risk management tool.

The Basics of ALM

The essence of liability management entails asset and cash flow management to meet financial specifications in a dynamic, volatile market. Managers work to ensure the gap between performance and goals is mitigated through hedging techniques. Gap reduction results in overall profitability as well as a reduction in exposure.

Surplus Optimization

ALM practitioners often refer to the ALM process as “surplus optimization.” In this context, surplus is defined as the net worth, calculated as the delta between the market value of assets and the present value of the aggregate liabilities. Because it addresses the long-term relationship between assets and liabilities, ALM is considered as a strategic process rather than a tactical one.

ALM Acceptance

A survey administered to private banking professionals shows a positive attitude towards asset liability management. A full 87% of respondents indicated a positive view of the potential benefits of ALM. They viewed ALM as a superior method toward managing long-term liabilities, as compared to traditional and recent risk management strategies. However, those moving toward the implementation stage of ALS realize that it is a comparatively complex system, and that they must work with investors to gain buy-in for this new method of exposure management.

Asset Liability Management in Action

Private banks may serve as intermediaries between clients and their projects which require funding. To supply the funding, banks assume deposits and the associated interest as liabilities. The loan interest from the clients forms the assets. The bank’s net interest margin between the two interest rates is the interest rate sensitivity. A private bank may use derivatives including swaps, swaptions, futures, and options to hedge the volatility of the interest rate sensitivity. Investors in a Dubai private bank should asses the exposure management of their potential institution, and considering choosing one that employs ALM.