Asset Liability Management Banks & Credit Unions

Asset liability management for banks & credit unions, as the phrase implies, is an asset liability management or ALM is the risk management technique or tool that assists banks and credit unions management of risks which have come from the mismatches arising between the assets and liabilities.

Financial institutions were the pioneer to use the concept of this risk management technique; but as time evolves, more and more corporations are adopting the ALM techniques.

When a certain bank or credit union is facing some risks such as the interest rate risk, credit risk, operational risk, and liquidity risk, it is the strategic management technique that can be used to help manage these risks. The technique works by matching their assets and liabilities which are according to maturity pattern.

Once you hire an asset liability management team, it will be responsible for the allocation of funds to different lending products. At the same time, it will ensure that the maturity sensitivity characteristics, currency, and interest rate of the assets and liabilities are going to be within the prescribed risk parameters.

The team uses some derivative instruments to achieve the goals to help the bank or credit union. Some of the extensively used derivative instruments are interest rate swaps, currency swaps, or other interest rates management products. To meet the clients' individual specific needs of hedging, the team secures and develops new innovative market solutions and new products.

To provide proper technical training to the borrowers on the pricing, credit aspects of the hedging products, and market execution, the team collaborates with some other units. In addition, the team participates in some necessary negotiations with the borrowers regarding master derivative agreements or MDAs.

How asset liability management started?

In the late mid-1970s, high interest rates plagued the industry. It has caused assets and liabilities to get mismatched. For the bankers and other financial lending institutions, this created a dilemma that must be taken cared of; else, they would go down the drain. In the late 1970s, the first asset liability management was created to fix the problem. It was also developed in the United States around early 1980s.

In this period, it was used with simple technique in the form of interest sensitivity gap. It is a measure of gap between the risk sensitive liabilities and risk sensitive assets, being calculated by comparison made to assets and liabilities' interest rate sensitivity and interest rate re-set date or earlier of the maturity.

The risk management was upgraded after many bankers and regulators in the United States found that the former technique has the inability of the gap analysis to properly deal with the long term mismatches of the interest rates. Modern risk management tools have another approach derived from the enterprise risk management. It acknowledges and reflects the fact that credit risk, liquidity risk, market risk, and interest rate risk are interrelated.

Basically, the banks and credit unions that would be employing the use of this risk management tool will be expecting assistance to the following:

-investing and/or disinvesting decisions -maintaining required statutory liquidity ratio and other ratios -generating and supporting reports and management modules such as interest rate simulation, data analysis, and graphical analysis.

If there are certain mismatches that have developed between banks assets and liabilities, asset liability management for banks & credit unions is an eligible management technique you can have. It is designed to accumulate adequate return at the same time as maintain excess of assets which are beyond the liabilities.

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