Asset & Liability Management Committee. Structures and Responsibilities.

Since the outbreak of the financial crisis it has become more and more clear that banks should have a prudent Asset and Liability Management in place. Not only in place but the members of the Asset and Liability Committee (ALCO) must have extensive knowledge of banking too of course. Asset and Liability Management is more than only debits and credits.

In banking, Asset and Liability Management (often abbreviated ALM) is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. This can also be seen in insurance.

Banks face several risks such as the:

• Liquidity Risk,
• Gap Risk,

• Interest Rate Risk,
• Credit Risk,
• Foreign Exchange Risk
• Operational Risk
• Management Off-Balance Sheet Activities.

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ALM is a strategic management tool to manage the above mentioned risks faced by banks. other financial services companies and corporations.

Banks manage the Risks of Asset Liability mismatch by matching the Assets and Liabilities according to the maturity pattern or the matching of the duration, by hedging and by securitization. Much of the techniques for hedging stem from the delta hedging concepts introduced in the BlackScholes model. The early origins of ALM date to the high interest rate periods of 1975-6 and the late 1970s and early 1980s in the United States.

Modern risk management now takes place from an integrated approach to enterprise risk management that reflects the fact that Interest Rate Risk, Credit Risk, Market Risk, and Liquidity Risk are all interrelated. The Jarrow-Turnbull model is an example of a risk management methodology that integrates default and random interest rates. Increasing integrated risk management is done on a full Mark to Market on a daily basis rather than the accounting basis that was at the heart of the first Interest Rate Sensitive Gap and Duration Calculations.

When you are interested in how to Structure an Asset and Liability Committee and you would like to get to know the responsibilities of the ALCO I have published a few extracts of this Policy on my Google Drive please click here .

The compleet Asset & Liability Management Committee. Structures and Responsibilities can be obtained at USD95.00 only.