Chapter 5
ASSET AND LIABILITY MANAGEMENT I
Asset–liability management (ALM) is a generic term that is used to refer to a number of things by different market participants. For bankers, the term is used to denote high-level management of a bank’s assets and liabilities; as such it is a strategy level discipline but at the business line level it is also a tactical one. ALM policy may be set within a bank’s Treasury division or more usually by its asset–liability committee (ALCO). The principle function of the ALM desk is to manage interest rate risk and liquidity risk. It will also set 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 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.
We describe the ALM function in this chapter and Chapters 6 and 7. In this chapter we introduce the key ALM concepts of liquidity and ALM policy.
Basic concepts
In financial markets the two main strands of risk management are interest rate risk and liquidity risk. ALM practice is concerned with managing this risk. Interest rate risk exists in two strands. ...
