Learning Objectives:

  • Define Asset-Liability Management and explain its strategic importance.

  • Understand the key risks addressed by ALM.

  • Recognise the ALM framework and its components.

1.1 Defining Asset-Liability Management

Asset-Liability Management (ALM) is the ongoing process of managing a bank’s balance sheet to mitigate the risks arising from mismatches between its assets and liabilities, particularly in terms of interest rate sensitivity and maturity . As the NPTEL course on Management of Commercial Banking notes, ALM is a core function that includes “Dollar Gap Analysis,” “Earnings Sensitivity Analysis,” and “Duration Gap Analysis” as key tools . The objective of ALM is to ensure stability of earnings and capital over time, and to manage the risk of default .

1.2 Key Risks Addressed by ALM

The BTRM course outlines the key risks that ALM addresses :

  • Interest Rate Risk (IRRBB): The risk to earnings and capital from adverse movements in interest rates .

  • Liquidity Risk: The risk that the bank cannot meet its obligations when they fall due .

  • Funding Risk: The risk of not being able to access funding sources or having to access them at an elevated cost .

  • Capital Risk: The risk of capital inadequacy, which is managed through capital planning and stress testing .

1.3 The ALM Framework

ALM is governed by a structured framework that includes :

  • ALM Policy: A formal document outlining the bank’s approach to managing interest rate, liquidity, and funding risks .

  • Risk Limits: Quantitative limits on risk exposures, such as limits on earnings at risk or liquidity gaps.

  • Reporting and Monitoring: Regular reporting to the ALCO on risk exposures and compliance with limits .

  • Contingency Planning: Plans for addressing severe stress events.

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