In banking, asset liability management is the practice of managing the risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. Banks face several risks such as liquidity risk, interest rate risk, credit and operational risk. Asset/Liability management (ALM) is a strategic management tool to manage Asset, Liability, spread of interest rate and liquidity risk faced by banks & Financial Institutions.
In absence of good/effective ALM
of a bank may lead it to following crisis:
- Liquidity
risk: the current and prospective risk arising when the
bank is unable to meet its obligations as they come due without adversely
affecting the bank's financial conditions.
- Interest rate risk: The risk of
losses resulting from movements in interest rates and their impact on
future cash-flows. One of the primary causes are mismatches in terms of
bank deposits and loans.
- Currency
risk management:
The risk of losses resulting from movements in exchanges rates. To the
extent that cash-flow assets and liabilities are denominated in different
currencies.
- Funding
and capital management: As all the mechanism to ensure the
maintenance of adequate capital on a continuous basis. (Usually a
prospective time-horizon of 2 years).
- Profit
planning and growth: Profit planning is required to make a
sufficient growth for the organization itself.
- In
addition,
ALM deals with aspects related to credit risk as this function is also to
manage the impact of the entire credit portfolio (including cash,
investments, and loans) on the balance sheet. The credit risk,
specifically in the loan portfolio, is handled by a separate risk
management function and represents one of the main data contributors to
the ALM team.
So,
it can be said undoubtedly that absence of good/effective ALM of a bank may
lead it to different crisis jeopardizing image and foundation of the bank