spot_img

What is Asset Liability Management or What is ALM ?

Asset liability management (ALM) can be defined as the comprehensive and dynamic framework for measuring, monitoring and managing the financial risks associated with changing interest rates, foreign exchange rates and other factors that can affect the organisation’s liquidity.

ALM relates to management of structure of balance sheet (liabilities and assets) in such a way that the net earning from interest is maximised within the overall risk-preference (present and future) of the institutions.

📚 JAIIB Study Resources 📚

🎥 Full Course Videos in Hindi-English
👉 Check Here

📝 JAIIB PPB Short Notes (Part 1)
👉 Check Here

📖 JAIIB Exam Free Study Material
👉 Check Here

📄 JAIIB Study Material PDF Notes 2025
👉 Get Tests Here

🔍 How to Prepare for PPB
👉 Check Here

📚 CAIIB Study Resources 📚

📖 CAIIB ABM - Advanced Bank Management Syllabus Priority
👉 Check Here

📘 Bank Financial Management - BFM Syllabus Priority
👉 Check Here

🎥 110+ CAIIB Case Study Videos
👉 Check Here

📝 ABM BFM Retail Previous Year Questions
👉 Get Tests Here

🎥 Full Course Videos in Hindi-English
👉 Check Here

📚 ABFM and BRBL Courses Now Available
👉 Click Here

🚀 CAIIB Crash Course
👉 Click Here

Thus the ALM functions includes the tools adopted  to mitigating liquidly 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 is all about managing three central risks:

  • Interest Rate Risk
  • Liquidity Risk
  • Foreign currency risk

For banks with forex operations, it also includes managing

Currency risk

Through ALM banks try to match the assets and liabilities in terms of Maturities and Interest Rates Sensitivities so as to minimize the interest rate risk and liquidity risk.

Overview of what are asset liability mismatches :

The Assets and Liabilities of the bank’s B/Sheet are nothing but future cash inflows & outflows.    Under Asset Liability Management i.e. ALM,  these inflows & outflows are grouped into different time buckets.  Then each bucket of assets is matched with the corresponding bucket of liability.

The differences in each bucket are known as mismatches.

Is complete matching of Assets & Liabilities in the Balance sheet necessary?

No, because banks can even make money as a result of such mismatches sometimes.  Alam Greenspan, ex-Chairman of US Federal Reserve has once observed “risk taking is necessary condition for wealth creation”.   However, it is a risky proposition to keep large mismatches as it can lead to massive losses in a volatile market.    Therefore,  in practice, the idea is to limit the mismatches rather than aim at zero mismatches.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

🤩 🥳 JAIIB NEW BATCH START 🥳 🤩spot_img
🤩 🥳 JAIIB CAIIB CLASSES 🥳 🤩spot_img

POPULAR POSTS

RELATED ARTICLES

Continue to the category

PPB JAIIB | Module A | Chapter 2 [FREE EPDFS]

Have you ever wondered how banks detect and prevent financial crimes like money laundering and terrorist financing? With increasing financial fraud, understanding KYC (Know...

JAIIB PPB | Module A | Chapter 3 [FREE EPDF]

Are you a banker preparing for JAIIB or CAIIB exams? Or perhaps you work in the financial sector and want to ensure compliance with...

IIBF CERTIFICATION TI & RM 2025 | All about Financial Marketing

Financial markets act as the backbone of economic growth, providing a platform for businesses to raise capital, individuals to invest their savings, and governments...

JAIIB 2025 RBWM | Introduction to Retail Banking Part 1 | Module A

In this detailed session, we kickstart the RBWM full syllabus with conceptual videos that simplify complex banking concepts. From understanding the history of retail...