Bank Asset-Liability and Liquidity Risk Management

Abstract

Asset-Liability Management is a generic term that is used to refer to a number of things by different market participants. We define it as the high-level man-agement of a bank’s assets and liabilities; as such it is a strategy-level discipline and not a tactical one. It may be set within a bank’s Treasury division or by its asset-liability committee (ALCO). The principal objective of the ALM function is to manage interest-rate risk and liquidity risk. It also sets overall policy for credit risk and credit risk management, although tactical-level credit policy is set at a lower level within credit committees. Although the basic tenets of ALM would seem to apply more to commercial banking, rather than investment banking, in reality it is important that it is applied to both functions. A trading desk still deals in assets and liabilities, and these must be managed for interest-rate risk and liquidity risk. In a properly integrated banking function, the ALM desk will have a remit covering all aspects of a bank’s operations.