Asset-Liability Management

Asset-Liability Management (ALM) is a core ... for financial institutions. It varying in scope among different institutions, but it is at least focused on managing the mismatch in durations between assets and liabilities. This involves interest rate risk, liquidity risk, and funding risk, which are essential for maintaining the financial stability of the institution. Key ALM strategies include gap analysis for assessing interest rate risk and duration matching to align the maturities of assets and liabilities.

Most definitions at least include the management of the duration mismatch between assets and liabilities in terms of interest rate risk, liquidity risk, funding risk. Related areas which are sometimes included in the term ALM are balance sheet management and capital management.

Balance sheet management often handles constraints imposed on the balance sheet by regulation.

Capital management monitors capital levels, optimizes capital structure, and ensures compliance with regulatory capital requirements.

Execution of the strategy as well as day-to-day management of short term liquidity is often referred to as treasury management. (?)

In addition, the risk control function imposes constraints on the balance through risk limits.

Balance Sheet Management and Capital Management

Related to ALM are the functions balance sheet management and capital management. Balance sheet management involves strategies to comply with regulatory constraints, balancing different types of assets and liabilities to enhance financial performance within these limits. Capital management focuses on optimizing the capital structure for efficiency and profitability while ensuring compliance with regulatory capital requirements.