The Moorad Choudhry Anthology, + Website

CHAPTER 11Bank Asset–Liability Management (ALM) and “Strategic ALM”

“The inconvenient truth is that mathematical models, though often touted as risk management tools, work best for everyday situations, when they are least needed. They are often wrong in a crisis, precisely when you need them most, but their wrongness is dressed up in mathematical pseudo‐precision…they are designed to work in perfectly calibrated, artificial conditions, not in reality.”

—Stephen Davis, Jon Lukomnik, and David Pitt‐Watson, What They Do With Your Money, New Haven, CT: Yale University Press, 2016

The asset–liability management (ALM) function in a bank is as old as banking itself, although it was not codified into a formal discipline in any real way until the early 1970s. The breakdown of the Bretton‐Woods system, greater volatility in interest rates and FX rates, and high inflation placed more emphasis on the business of bank balance sheet management, and hence the importance of the ALM desk in a bank grew. It was the economic and geo‐political circumstances prevailing in the early 1970s that acted as a catalyst towards the development of the ALM discipline. However, the function never really acquired any formal academic cachet and has never attracted the research interest that, say, derivatives or structured finance has. That is something of a paradox because unlike derivatives or structured products, the active use of which is the preserve of only a small percentage of the world's banks, ...