The Principles of Banking, 2nd Edition

PART IIBank Asset and Liability Management

Part I was a primer on banking, the elements of which all feed into the essence of banking discipline, which is asset–liability management (ALM). In Part II we are in a position now to introduce ALM itself.

ALM is an art that is required to be practised at every bank in every country. This is a simple statement of fact. The act of undertaking banking, offering loans and deposits to customers, creates a balance sheet of assets and liabilities that need to be managed effectively, and ideally optimally, in perpetuity. Unlike topics in banking and finance that attract much attention from business media and academia (particularly academia), such as exotic derivatives, options valuation, CDO structuring, credit derivatives, traded market risk hedging, and so on, ALM is universal to every bank in the world. It applies to every bank. Period. So naturally we will spend some time on this topic.

In Part II of the book we review the main strands of the ALM discipline, covering liquidity risk, funding risk, banking book market risk and FX risk, and then look at the role of the ALM Committee (ALCO) and ALCO reporting. The ALCO is the most important executive committee in the bank, bar none. Our discussion covers the terms of reference of the ALCO, a look at the main drivers of the ALCO agenda, and the management information (MI) content essential to effective ALCO governance. It also includes a look at the organisation of the Group ALCO (GALCO) ...