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.
1. 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.
2. 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.
3. 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.
4. 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).
5. Profit
planning
and
growth:
Profit planning
is required to
make a sufficient growth for the organization itself.
6. 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.