Asset Liability Management Optimisation

Introduction

The role of the Asset Liability Management function (ALM) in the management of the banking book of a bank is constantly growing. A clear evolution can be seen as ALM managers realise that a reactive approach, which consists of the management of the banking book as a passive structure resulting from the commercial and funding strategy of a bank, should be replaced by a proactive approach where the banking book structure is decided in a conscious and active way in order to come up with the desired target structure of the banking book.

The intention of this book is to promote a change in the role of ALM and, in general, in the approach towards financial risk management practice in modern finance. It will show that the proactive role of ALM through an integrated approach for the management of two main financial risk categories, i.e. interest rate risk (IRR) and liquidity risk under one approach, and interrelation with the commercial strategy that a bank wants to adopt, brings significant benefits. Those benefits are mainly economical and can be quantified. The need for change seems to be driven by a number of challenges, such as a heavily regulated landscape, low or negative rates (in the eurozone), and margin compression, which the banking industry has been facing since 2008.

This is why the word ‘optimisation’ is commonly used in banks these days as an attempt to address the aforementioned challenges. However, I quite often wonder what this word means in practice. ...