Asset Liability Management Review Process


Maturity mismatch and duration mismatch of assets and liabilities expose banks to various forms of market risk. They should therefore carry out frequent reviews of asset-liability items through an asset liability management (ALM) system to effectively monitor and control the emerging risks. The Asset Liability Management Committee (ALCO) is the authority that reviews the changing composition of market risk–related asset-liability items, assesses the severity of emerging risk factors, and initiates corrective actions.

The ALM review process begins with the scrutiny and the risk analysis of the asset-liability maturity gaps under different maturity buckets that arise during the course of a bank's business. Maturity gaps are identified from the structural liquidity statements compiled on a weekly basis and short-term dynamic liquidity statements compiled on a monthly basis. The structural liquidity statements show the current gaps between the bank's assets and liabilities in the prescribed maturity buckets, and the analysis of the gaps reveals the extent of its sensitivity to liquidity risk, interest rate risk, and foreign exchange risk. The conclusions guide the bank to identify the dangers that may arise from changing market risk factors and form strategies to make appropriate responses to the emerging scenarios.

The effectiveness of the ALM review process is dependent on two factors. First, maturity ...

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