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.

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 2023
Get Tests Here
————————————————————-
how to prepare for ppb
Check Here
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

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

Certified Credit Professional Free Pdf Study Material

Introduction   Both organisations and people must have a solid understanding of credit management in the fast-paced financial environment of today. In order to keep a...

Risk Management Numerical On Foreign Exchange

What is Foreign Exchange? Foreign Exchange or FX, is an investment market that majority of individuals can understand but handful can truly master. It is...

JAIIB 2023: Eligibility, Syllabus and Registration

Introduction to JAIIB 2023 Exam Junior Associates of the Indian Institute of Bankers is referred to as JAIIB. It is a flagship course provided by...

Small Finance Banks: Free PDF Study Material

Small Finance Banks: A Detailed Overview  Small Finance Banks (SFBs) were brought in to the Indian banking structure in 2015 to meet the unique needs...