What is Asset Liability Management?

Asset-Liability-Management

Imagine you were put in charge of billions of customer dollars, but you lost them. Congratulations, you are a decision-maker at Silicon Valley Bank. SVB’s inability to manage both interest rate risk and liquidity risk sent them into a painful spiral. The California-based bank was not the first to ever make a major mistake in asset liability risk management, and they are likely not going to be the last. However, they highlight the extreme importance of paying attention to this key area of business preparedness, and organizations the world over have taken heed. Whether you help operate ALM strategies at a bank, an insurance company, or a pension fund, the recent failures of SVB are a clarion call to become versed and fluent in ALM.  

Asset-liability management Explained

Simply put, ALM seeks to manage assets to reduce the risk of not meeting a liability. Since the inability to honor a liability threatens the profits and strategic planning initiatives and goals of any organization – and on a smaller scale, any individual who manages their finances – this competency is central to operations. In extreme situations, poor ALM presents an existential threat to the existence of the organization itself. 

Using various models for conceptualizing risk can yield different outcomes and scenarios to consider, so it’s important to understand these models and the strengths and weaknesses of each relative to your enterprise. 

Pros and Cons of Asset Liability Management

Efficiency and profitability are two of the most important effects of ALM, but you might count the continued trust in your financial stewardship even above those. Without trust, your organization is as good as toast, as recent bank runs have shown. Once your ALM models are robust, the ability to efficiently invest in capital-generating ventures emerges, producing profitability. Additionally, the creation of tools and forecasts that can be used in a company-wide setting allows for better overall strategic planning and decision-making. With the overall balance sheet in view, and data from many different pieces of the ALM puzzle readily available, financial professionals become more well-armed for their fight to advance their company’s goals. 

On the other hand, some view ALM as time-consuming due to the need for effective, timely, and streamlined communication between many different departments. They also note a need for investment in technology for more robust projections and analysis. These needs often include an overhaul of older, outdated processes, which might have relied on rudimentary software, to versions that harness machine learning, advanced analytics, and other new developments. While these ultimately create better environments for managing assets and liabilities, their initial implementation can be seen as a hurdle for some. 

Strategies for Asset and Liability Management

Deposits and loans make excellent stand-ins for the concepts of assets and liabilities. The interest rates on each must be carefully balanced and monitored in the context of the changing economic landscape to ensure a positive margin when examined as part of a whole. 

Liquidity risk, currency risk, and capital market risk each have their own recommended strategies and approaches for managing ALM, and each should be developed to suit your specific organizational needs with tailored processes and systems. Liquidity risk addresses the ability to meet cash-flow obligations, and contingency funding plans specifically address the actions to take during a liquidity crisis. Currency risk, often called exchange rate risk, refers to the fluctuating exchange rates of currencies relative to one another. Capital market risk refers to the danger of investments moving unfavorably. 

Even environmental problems can factor into ALM, as Dimitris Papathanasiou, head of global funding concentration and international treasury risk at Credit Suisse, has argued recently. Loans to oil and petrochemical industries could present unique risks in a global environment rapidly being affected by climate change, he suggested. 

Tools for the management of ALM are available for purchase, with varying rollout periods. They can also help facilitate the regular reviews and revisions to ALM plans and strategies for tackling crises by identifying plausible events that may stress the bank, company, or asset management group. These regular reviews and revisions should become standard for any operation hoping to maintain a sound foundation for investing. 

BankersHub offers in-depth certifications for banking professionals who want to learn more about asset liability management. Our Bank Accounting Specialist certification includes an overview of asset-liability management and interest-rate risk specifically tailored to learners who want to stay abreast of recent changes in regulations, capital requirements, interpretations of GAAP (Generally Accepted Accounting Principles), and more. To become a Certified Treasury Manager, you’ll learn about Enterprise Risk Management, for which asset and liability management has asserted itself as a crucial component not just during the 2008-2009 financial crisis but during the recent failures of Silicon Valley Bank and others. 

Wipfli

UDAAP: Avoiding Consumer Harm & Monitoring for Consumer Complaints

September 30, 2024 @ 2:00 pm – 3:00 pm – This lending compliance webinar will review best practices, procedures, and tools to strengthen your UDAAP compliance program, as well as review how to incorporate the requirements of the new Fair Debt Collections Practices Act into your UDAAP program.

Read More »
ACH-Returns

ACH Basics 3-Part Bootcamp

September 23, 2024 – September 25, 2024 @ 2:00 pm – 3:00 pm – This three-part series focuses on the basics of ACH, including the history of the network, defining the parties of ACH transactions, their roles and responsibilities, and the transaction flow and settlement process. In addition, we will cover all aspects of exception item processing, including your options in handling unauthorized transactions, stop payments and revoked authorizations. […]

Read More »
Cash Flow

Why EBITDA Doesn’t Spell Cash Flow

September 24, 2024 @ 12:00 pm – 1:00 pm – EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) is a popular measure of cash flow, but it is not accurate, and those who rely on it as an indicator of repayment ability will be deeply disappointed

Read More »

More Posts

14 Effective Deposit Growth Strategies for Banks

Banks face significant challenges in growing their deposit bases in an era of unprecedented competition and evolving consumer expectations. Modern financial institutions must deploy innovative and customer-centric strategies to attract

Digital Banking Frauds

9 Types of Digital Banking Frauds to Be Aware Of

The banking industry has undergone a remarkable transformation in the era of digitization, enabling seamless transactions and improved customer experiences. However, with these advancements come sophisticated threats that target digital

EBITDA

What is EBITDA & Is It Reliable?

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a metric that often sparks lively debate among financial professionals. Stripping out the cost of certain expenses may provide a clearer

What is a Fair Lending Risk Assessment?

A fair lending risk assessment is a critical process financial institutions use to ensure they comply with fair lending regulations. These laws aim to prevent discrimination in lending practices and