ALM: Asset Liability Management (ALM) can be defined as a mechanism to address the risk faced by a bank due to a mismatch between assets and liabilities either due to liquidity or changes in interest rates. Liquidity is an institution’s ability to meet its liabilities either by borrowing or converting assets. Apart from liquidity, a bank may also have a mismatch due to changes in interest rates as banks typically tend to borrow short term (fixed or floating) and lend long term (fixed or floating).
A comprehensive ALM policy framework focuses on bank profitability and long term viability by targeting the net interest margin (NIM) ratio and Net Economic Value (NEV), subject to balance sheet constraints. Significant among these constraints are maintaining credit quality, meeting liquidity needs and obtaining sufficient capital.
ALCO: Asset Liability Management (ALM) is an integral part of Bank
Management; and so, it is essential to have a structured and systematic process
for manage the Balance Sheet. Committee comprising of the senior management of
the bank to make important decisions related to the Balance Sheet of the Bank
(asset-Liability). The committee typically called the Asset Liability Committee
(ALCO). As per BB guideline, the committee consists of the following key
personnel of a bank:
- Chief Executive
Officer / Managing Director
- Head of Treasury /
Central Accounts Department
- Head of Finance
- Head of Corporate
Banking
- Head of Consumer
Banking
- Head of Credit
- Chief Operating
Officer / Head of Operations
The committee calls for a meeting once every month to set and review
strategies
The key roles and
responsibilities of the ALM Desk:
1) To assume overall
responsibilities of Money Market activities.
2) To manage liquidity
and interest rate risk of the bank.
3) To comply with the
local central bank regulations in respect of bank’s statutory obligations as
well as thorough understanding of the risk elements involved with the business.
4) Understanding of the
market dynamics i.e competition, potential target markets etc.
5) Provide inputs to
the Treasurer regarding market views and update the balance sheet movement.
6) Deal within the dealer’s authorized limit.