The Principles of Banking, 2nd Edition

CHAPTER 5Asset–Liability Management I

Abstract

In the ordinary course of business banks undertake customer business that produces a mismatched balance sheet. This mismatch is manifested in the tenors of loans and deposits and their interest rate bases. Managing the liquidity and market risk that arises from this mismatch is the primary role of the asset-liability management (ALM) desk in a bank. The ALM discipline is a recent one in the history of banking; as a formal discipline it dates only from the 1970s. The traditional approach to ALM followed a reactive pattern and was concerned with managing risk in response to changes in market circumstances. The current approach emphasises a proactive approach that seeks to influence the business origination process so as to create a balance sheet shape and structure that is as optimised as possible. This is known as strategic ALM.

Banks are by their nature risk-taking institutions. This is a requirement of their business, because their customers will have specific requirements that the bank will wish to meet. For instance, corporate borrowers may wish to tailor their loans to meet the precise needs of their business, so as to achieve some certainty in their cash flow planning. Similarly, retail clients may wish to access banking products and services to meet their personal needs, such as purchasing a house or investing for a child's education. To meet this demand, banks generally offer lending terms, maturities, rate options, currency, ...