Chapter 6
ASSET AND LIABILITY MANAGEMENT II
In our second ALM chapter, we delve deeper – or more accurately wider – into the topic. The art of asset and liability management is essentially one of risk management and capital management, and although day-to-day activities are run at the desk level, overall direction is given at the highest level of a banking institution. Risk exposures in a banking environment are multi-dimensional; as we have seen, they encompass interest rate risk, liquidity risk, credit risk and operational risk. Interest rate risk is one type of market risk. Risks associated with moves in interest rates and levels of liquidity1 are those that result in adverse fluctuations in earnings levels due to changes in market rates and bank funding costs. By definition, banks’ earnings levels are highly sensitive to moves in interest rates and the cost of funds in the wholesale market. Asset and liability management covers the set of techniques used to manage interest rate and liquidity risks; it also deals with the structure of the bank’s balance sheet, which is heavily influenced by funding and regulatory constraints and profitability targets.
In this chapter we review the concept of balance sheet management, the role of the ALM desk, liquidity risk and maturity gap risk. We also review a basic gap report. The increasing use of securitization and the responsibility of the ALM desk in enhancing the return on assets on the balance sheet is also introduced. For readers ...
