Asset-Liability Management
Asset-Liability Management
“Asset-Liability Management (ALM) can be defined as the ongoing process of formulating, implementing, monitoring and revising strategies related to assets and liabilities to achieve an organization 's financial objectives, given the organization 's risk tolerances and other constraints”[1]. ALM also is known as balance sheet management. In banking activity the gap between assets and liabilities can bring some consequences where the following risks are arose. And as a whole it influences badly on the bank’s functioning. Solving that problem is the primary goal of ALM. The good balance sheet management means that the return on loans and securities as the highest as possible, risks are minimized and liquid assets are in adequate amount (See Appendix 1 and 2). For these reasons bank staff when managing assets and debts should follow four main strategies which include liquidity, asset, liability and capital adequacy management[2] (See Appendix 3). Traditionally, ALM has focused primarily on the interest rates risk[3] which is arose when the maturity of assets and debts and their volume are not the same. For example, commercial bank is viewed as ‘short-funded’ when the maturity of its assets is longer than the liability maturity. On the contrary, bank can be called ‘long-funded’ when the maturity of debt is bigger. Both situations are risky and maybe not much profitable because in both cases bank has to refinance or reinvest funds at a rate that can be unfavorable. However, today in addition to interest rate risk, the control of a much broader range of risks such as equity, liquidity, currency, credit, operational risks etc. is engaged by balance sheet management. Also there are some methods commercial banks use to manage the risks: by matching the assets and liabilities according to the maturity pattern or the matching the duration, by hedging and by securitization.
Asset securitization
‘Asset securitization is
“Asset-Liability Management (ALM) can be defined as the ongoing process of formulating, implementing, monitoring and revising strategies related to assets and liabilities to achieve an organization 's financial objectives, given the organization 's risk tolerances and other constraints”[1]. ALM also is known as balance sheet management. In banking activity the gap between assets and liabilities can bring some consequences where the following risks are arose. And as a whole it influences badly on the bank’s functioning. Solving that problem is the primary goal of ALM. The good balance sheet management means that the return on loans and securities as the highest as possible, risks are minimized and liquid assets are in adequate amount (See Appendix 1 and 2). For these reasons bank staff when managing assets and debts should follow four main strategies which include liquidity, asset, liability and capital adequacy management[2] (See Appendix 3). Traditionally, ALM has focused primarily on the interest rates risk[3] which is arose when the maturity of assets and debts and their volume are not the same. For example, commercial bank is viewed as ‘short-funded’ when the maturity of its assets is longer than the liability maturity. On the contrary, bank can be called ‘long-funded’ when the maturity of debt is bigger. Both situations are risky and maybe not much profitable because in both cases bank has to refinance or reinvest funds at a rate that can be unfavorable. However, today in addition to interest rate risk, the control of a much broader range of risks such as equity, liquidity, currency, credit, operational risks etc. is engaged by balance sheet management. Also there are some methods commercial banks use to manage the risks: by matching the assets and liabilities according to the maturity pattern or the matching the duration, by hedging and by securitization.
Asset securitization
‘Asset securitization is