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ASSET/LIABILITY MANAGEMENT AND LIQUIDITY RISK
Asset/liability management (ALM) is the structured decision-making process for matching, and deliberately mismatching, the mix of assets (e.g., loans) and liabilities (e.g., deposits) on a firm’s balance sheet. ALM is particularly critical for financial institutions, such as commercial banks, savings and loans, insurance companies, and pension funds.
Banks, for example, are involved in collecting deposits and extending loans to retail and corporate clients. This financial intermediation activity generates two types of imbalances: first, an imbalance between the amount of funds collected and lent, and second, an imbalance between the maturities as well as the interest rate sensitivities of the sources ...
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