09-08-2012, 03:21 PM
Asset Liability Management
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Definition
Asset and Liability management is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank.
Standard Definition
ALM assumes critical significance in banking because the banks typically borrow short and lend long and therefore, the mismatch between cash inflows and cash outflows is inherent in banking.
Purpose & Objective of ALM
An effective Asset Liability Management Technique aims to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole so as to attain a predetermined acceptable risk/reward ration.
It is aimed to stabilize short-term profits, long-term earnings and long-term substance of the bank. The parameters for stabilizing ALM system are:
1. Net Interest Income (NII)
2. Net Interest Margin (NIM)
3. Economic Equity Ratio
ALM Organization
The Board should have overall responsibility for management of risks and should decide the risk management policy of the bank and set limits for liquidity, interest rate, foreign exchange and equity price risks.
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The Asset - Liability Committee (ALCO) consisting of the bank's senior management including CEO should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the bank