- Asset liability management
In banking, asset liability management is the practice of managing
risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank.
Banks face several risks such as the
liquidity risk, interest rate risk, credit riskand operational risk. Asset Liability management (ALM) is a strategic managementtool to manage interest rate risk and liquidity risk faced by banks, other financial services companies and corporations.
Banks manage the risks of
Asset liability mismatchby matching the assets and liabilitiesaccording to the maturity pattern or the matching the duration, by hedging and by securitization. Much of the techniques for hedging stem from the delta hedgingconcepts introduced in the Black-Scholesmodel and in the work of Robert C. Mertonand Robert A. Jarrow. The early origins of asset and liability management date to the high interest rate periods of 1975-6 and the late 1970s and early 1980s in the United States. Van Deventer, Imai and Mesler (2004), chapter 2, outline this history in detail.
Modern risk management now takes place from an integrated approach to enterprise
risk managementthat reflects the fact that interest rate risk, credit risk, market risk, and liquidity riskare all interrelated. The Jarrow-Turnbull modelis an example of a risk management methodology that integrates default and random interest rates. The earliest work in this regard was done by Robert C. Merton. Increasing integrated risk managementis done on a full mark to market basis rather than the accounting basis that was at the heart of the first interest rate sensivity gap and duration calculations.
*Van Deventer, Imai and Mesler (2004), chapter 2
* [http://www.soa.org/library/professional-actuarial-specialty-guides/professional-actuarial-specialty-guides/2003/september/spg0308alm.pdf Society of Actuaries Professional Actuarial Specialty Guide describing Asset Liability Management]
* [http://www.riskglossary.com/link/asset_liability_management.htm Asset-Liability Management by riskglossary.com]
* [http://www.coolavenues.com/know/fin/sayonton_1.php3 Asset Liability Management in Risk Framework by CoolAvenues.com]
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