Asset Liability Management Optimisation

CHAPTER 1ALM of the Banking Book

This chapter describes in detail the main concepts related to the Asset Liability Management (ALM) in a commercial bank. Several aspects are analysed and put in evidence. It highlights the evolving role of ALM and its growing importance in ensuring the healthy and profitable structure of the banking book. There is an overview of financial risks existing in the banking book and managed within the ALM function, and a reminder of the Basel Committee on Banking Supervision (BCBS) practices related to the liquidity and funding risk, known as Basel III. Quite an important portion of this chapter is devoted to the Funds Transfer Pricing process (FTP) and its role in the management of interest rate risk and liquidity risk in the banking book.

The final part of this chapter is focused on the selective review of the main literature positions which have contributed significantly to the developments in the ALM field and have ensured the progress in the ALM role, risk measurement techniques, and profitability enhancement strategies.

THE ROLE OF ASSET LIABILITY MANAGEMENT IN COMMERCIAL BANKS

Under the common definition, Asset Liability Management (ALM) means the management of the balance sheet structure with two main objectives:

• to keep risks within the limits of risk bearing capacity;
• to earn on the capital utilised for banking book risks.

Those objectives are set within a bank's treasury division by a bank's Asset Liability Committee (ALCO) in a sense ...