Asset and liability management (often abbreviated ALM) is the term covering tools and techniques used by a

bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

or other corporate to minimise exposure to

market risk Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility. There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the m ...

and

liquidity risk Liquidity risk is a financial risk that for a certain period of time a given financial asset, security or commodity cannot be traded quickly enough in the market without impacting the market price. Types Market liquidity – An asset cannot be ...

through holding the optimum combination of assets and liabilities. It sometimes refers more specifically to the practice of managing

financial risk Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financi ...

s that arise due to mismatches - "

duration gap In Finance, and accounting, and particularly in asset and liability management (ALM), the duration gap measures how well matched are the timings of Cash flow, cash inflows (from assets) and cash outflows (from liabilities), and is then one of the ...

s" - between the

assets In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

and liabilities, on the firm's

balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...

or as part of an

investment strategy In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics ...

. ALM sits between

risk management Risk management is the identification, evaluation, and prioritization of risks, followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, Threat (sec ...

and

strategic planning Strategic planning is the activity undertaken by an organization through which it seeks to define its future direction and makes decisions such as resource allocation aimed at achieving its intended goals. "Strategy" has many definitions, but it ...

. It is focused on a long-term perspective rather than mitigating immediate risks; see, here, treasury management. The exact roles and perimeter around ALM can however vary significantly from one bank (or other

financial institution A financial institution, sometimes called a banking institution, is a business entity that provides service as an intermediary for different types of financial monetary transactions. Broadly speaking, there are three major types of financial ins ...

) to another depending on the business model adopted and can encompass a broad area of risks. Traditional ALM programs focus on

interest rate risk Interest rate risk is the risk that arises for bond owners from fluctuating interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The ...

and

because they represent the most prominent risks affecting the organization. Its scope, though, includes the allocation and management of assets, equity, interest rate and credit risk management including risk overlays, and the calibration of company-wide tools within these risk frameworks for optimisation and management in the local regulatory and capital environment. Often an ALM approach passively matches assets against liabilities (fully hedged) and leaves surplus to be actively managed.

References

Cited Bibliography * *Van Deventer, Imai and Mesler (2004), chapter 2 *

External links

Society of Actuaries Professional Actuarial Specialty Guide describing Asset Liability ManagementAsset - Liability Management System in banks - Guidelines

Reserve Bank of India Reserve Bank of India, abbreviated as RBI, is the central bank of the Republic of India, and regulatory body responsible for regulation of the Indian banking system and Indian rupee, Indian currency. Owned by the Ministry of Finance (India), Min ...

Asset-liability Management: Issues and trends
R. Vaidyanathan, ASCI Journal of Management 29(1). 39-48
Price Waterhouse Coopers Status of balance sheet management practices among international banks 2009
* ttp://www.bis.org/publ/bcbs238.htm Bank for International Settlements Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools {{Authority control Banking Insurance Liability (financial accounting) Asset management

See also

References

External links