The Liquidity Risk Management Guide: From Policy to Pitfalls

3 The ALM Function – The Framework on Top of Liquidity Management

Even though this book focuses on liquidity management and policy and as such is not a book about ALM, it is important to understand how liquidity management fits into the overall framework of asset–liability management. In this chapter we will therefore discuss the various tasks ALM is responsible for.

The term Asset–Liability Management (ALM) is a loosely defined term by market participants but for the purposes of this book ALM will be viewed as the strategic and tactical management of a bank's assets and liabilities, rather than execution or tactical allocation only. ALM is therefore the practice of managing risk that rises due to mismatches between the assets and liabilities of a firm and can be defined as a strategic management tool to manage interest rate risk and liquidity risk. As such ALM is part of the risk management framework of a bank, but does not limit its scope to one type of risk but rather all risk factors that come into play when a mismatch is between assets and liabilities. This makes the ALM approach to risk management different from other risk bodies in three major ways.

Firstly, as opposed to other committees or divisions within a firm that have their mandate specified by the type of risks, such as a credit risk committee, ALM looks at various different risk factors.

Secondly, the ALM is empowered to focus on strategic decisions as well as tactical implementation. Thus, whereas a credit ...