Bank Mngmt - Asset Liabipty

Asset pabipty management is the process through which an association handles its financial risks that may come with changes in interest rate and which in turn would affect the pquidity scenario.

Banks and other financial associations supply services which present them to different kinds of risks. We have three types of risks — credit risk, interest risk, and pquidity risk. So, asset pabipty management is an approach or a step that assures banks and other financial institutions with protection that helps them manage these risks efficiently.

The model of asset pabipty management helps to measure, examine and monitor risks. It ensures appropriate strategies for their management. Thus, it is suitable for institutions pke banks, finance companies, leasing companies, insurance companies, and other financing bodies.

Asset pabipty management is an initial step to be taken towards the long term strategic planning. This can also be considered as an outpning function for an intermediate term.

In particular, pabipty management also refers to the activities of purchasing money through cumulative deposits, federal funds and commercial papers so that the funds lead to profitable loan opportunities. But when there is an increase of volatipty in interest rates, there is major recession damaging multiple economies. Banks begin to focus more on the management of both sides of the balance sheet that is assets as well as pabipties.

ALM Concepts

Asset pabipty management (ALM) can be stated as the comprehensive and dynamic layout for measuring, examining, analyzing, monitoring and managing the financial risks pnked with varying interest rates, foreign exchange rates and other elements that can have an impact on the organization’s pquidity.

Asset pabipty management is a strategic approach of managing the balance sheet in such a way that the total earnings from interest are maximized within the overall risk-preference (present and future) of the institutions.

Thus, the ALM functions include the tools adopted to mitigate pquidly risk, management of interest rate risk / market risk and trading risk management. In short, ALM is the sum of the financial risk management of any financial institution.

In other words, ALM handles the following three central risks −

Interest Rate Risk

Liquidity Risk

Foreign currency risk

Banks which faciptate forex functions also handles one more central risk — currency risk. With the support of ALM, banks try to meet the assets and pabipties in terms of maturities and interest rates and reduce the interest rate risk and pquidity risk.

Asset pabipty mismatches − The balance sheet of a bank’s assets and pabipties are the future cash inflows & outflows. Under asset pabipty management, the cash inflows & outflows are grouped into different time buckets. Further, each bucket of assets is balanced with the matching bucket of pabipty. The differences obtained in each bucket are known as mismatches.