Understand the Impact of Asset Liability Management on Financial

Asset Liability management in the banking institutions refers to the practice of managing various risks that may arise as a result of differences between liabilities (advances and loans) and assets of the bank. Banks are faced with diverse risks including risks that have to do with interest, assets and currency exchange risks. One tool to manage the liquidity and interest rate risk faced by different banks is Asset liability management.

Mismatch of assets and liabilities:

Various liabilities and assets according to the duration or maturity pattern manage the mismatch of Asset liability management (ALM) risks, by securities and by hedging. Assets liability management is an integral aspect of the financial management process of most banks. It is concerned with the strategic balance sheet management, which involves risk caused by changes in the exchange rates, interest rates and the liquidity position of the bank. ALM is a risk management method, which is made to generate a sufficient retain while maintain a sustainable assets above the liabilities. The following are taken into consideration, earning power, interest rates, and the degree of willingness.

The global financial markets over the few years have seen a wide range of changes. There is an intense competition for business concerning both the liabilities and assets, with increasing volatility in the domestic interest rates. The asset liability management process lies on three basic pillars

·         Asset liability management information system

·         Information adequacy, accuracy, availability, and expediency.

·         Management information system

Asset Liability Management information systems

In the ALM process, information is very important. Bearing in mind of the large network and the lack of sufficient system in collecting information on the basis of residual maturity and the behavioral pattern. The management and measuring of liquidity needs are important activities of commercial banks. Measuring and managing liquidity needs are vital activities of commercial banks. By assuring a bank’s ability to meet its liabilities as they become due, liquidity management can reduce the probability of an adverse situation developing.

The significance of liquidity

Bank management should not measure the liquidity positions of banks on an ongoing basis but also examine how liquidity requirements are likely to evolve under crisis scenarios. From experience it has shown that assets normally as liquid such as government securities and other money market instruments could become illiquid when the market and players are unidirectional. Therefore, liquidity has to be tracked through maturity or cash flow mismatches.

The Impact of Risks in Asset Liability Management

It is the risk of having a negative impact on a bank’s future earnings and on the market value of its equity due to changes in interest rates. Liquidity Risk: It is the risk of having insufficient liquid assets to meet the liabilities at a given time. Asset liability management is a continuous matter, which must be properly managed with preventive steps taken to mitigate problem associated. Irreparable damage can be done to the bank in terms of solvency, profitability, and liquidity, if not properly monitored.

Princess Kay in this post looks at what Asset liability management and how it is a continuous process. She also looked at the four key risk level associated with risk management system.