Asset liability management

Asset liability management

In banking, asset liability management is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank.

Banks face several risks such as the liquidity risk, interest rate risk, credit risk and operational risk. Asset Liability management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk faced by banks, other financial services companies and corporations.

Banks manage the risks of Asset liability mismatch by matching the assets and liabilities according to the maturity pattern or the matching the duration, by hedging and by securitization. Much of the techniques for hedging stem from the delta hedging concepts introduced in the Black-Scholes model and in the work of Robert C. Merton and Robert A. Jarrow. The early origins of asset and liability management date to the high interest rate periods of 1975-6 and the late 1970s and early 1980s in the United States. Van Deventer, Imai and Mesler (2004), chapter 2, outline this history in detail.

Modern risk management now takes place from an integrated approach to enterprise risk management that reflects the fact that interest rate risk, credit risk, market risk, and liquidity risk are all interrelated. The Jarrow-Turnbull model is an example of a risk management methodology that integrates default and random interest rates. The earliest work in this regard was done by Robert C. Merton. Increasing integrated risk management is done on a full mark to market basis rather than the accounting basis that was at the heart of the first interest rate sensivity gap and duration calculations.


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

External Links

* [ Society of Actuaries Professional Actuarial Specialty Guide describing Asset Liability Management]
* [ Asset-Liability Management by]
* [ Asset Liability Management in Risk Framework by]

Wikimedia Foundation. 2010.

Look at other dictionaries:

  • asset/liability management — ( ALM) Coordinated management of all of the financial risks inherent in the business conducted by a financial institution. The process of balancing the management of separate types of financial risk to achieve desired objectives while operating… …   Financial and business terms

  • Asset Liability Management — Asset Liability Management, oft abgekürzt mit ALM, bezeichnet ein Risikomodell zur Aktiv Passiv Steuerung in Bilanzen. Diese Methode des Risikomanagements wird hauptsächlich von Banken und Versicherern angewendet. Zielsetzung beim ALM ist es, mit …   Deutsch Wikipedia

  • asset-liability management — The management of assets and liabilities in order to influence the credit risk, interest rate risk, and liquidity risk of a bank. See asset and liability management committee; gap analysis …   Big dictionary of business and management

  • Asset/Liability Management — A technique companies employ in coordinating the management of assets and liabilities so that an adequate return may be earned. Also known as surplus management. By managing a company s assets and liabilities, executives are able to influence net …   Investment dictionary

  • Asset/liability management — Also called surplus management, the task of managing funds of a financial institution to accomplish the two goals of a financial institution: (1) to earn an adequate return on funds invested and (2) to maintain a comfortable surplus of assets… …   Financial and business terms

  • asset/liability management committee — ( ALCO) A committee, usually comprising senior managers, responsible for managing assets and liabilities to maximize income and safety over the long run. In a financial institution, the ALCO is usually responsible for asset and liability… …   Financial and business terms

  • Asset liability mismatch — In finance, an asset liability mismatch occurs when the financial terms of the assets and liabilities do not correspond. For example, a bank that chose to borrow entirely in U.S. dollars and lend in Russian rubles would have a significant… …   Wikipedia

  • Asset–liability mismatch — In finance, an asset–liability mismatch occurs when the financial terms of an institution s assets and liabilities do not correspond. Several types of mismatches are possible. For example, a bank that chose to borrow entirely in US dollars and… …   Wikipedia

  • asset and liability management committee — ALCO A senior management committee of a bank or financial institution that has overall responsibility for setting and overseeing risk control policies in relation to the balance sheet (see asset liability management; gap analysis). In some cases… …   Big dictionary of business and management

  • Asset and Liability Management — Gestion actif passif Pour les articles homonymes, voir ALM. Poste Montant Comptes débiteurs 10 Prêts immobiliers aux ménages 25 Prêts d investissement aux entreprises 20 Titres d état 5 Dépôts et épargne …   Wikipédia en Français

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”