The Principles of Banking

Chapter 6

Asset–Liability Management I

Asset–liability management (ALM) is a generic term that is used to refer to a number of things by different market participants. We believe however that it should be used to denote specifically the high-level management of a bank's assets and liabilities; as such it is a strategy-level discipline and not a tactical one. It is usually implemented within a bank's Treasury division, with overall policy set by the asset–liability committee (ALCO). The principal function of the ALM desk is to manage interest-rate risk and liquidity risk. It will also set overall policy for credit risk and credit risk management, although tactical-level credit policy is set at a lower level within credit committees. Although the basic tenets of ALM would appear to apply more to commercial banking rather than investment banking, in reality it is an essential discipline for all types of financial institution. The market-making desk in an investment bank still deals in assets and liabilities, and these must be managed for interest-rate risk and liquidity risk. In a properly integrated banking function the ALM desk must have a remit overseeing all aspects of a bank's operations.

In this chapter we introduce the key ALM concepts of liquidity management policy and the internal cost of funds.

Basic Concepts

In financial markets the two main strands of risk management are interest-rate risk and liquidity risk. ALM practice is concerned with managing these risks. Interest-rate ...