in'Asset Liability Management
In'Asset Liability Management can be defined as a mechanism to address the risk faced by a bank due to a mismatch between assets and liabilities either due to liquidity or changes in interest rates. Liquidity is an institution’s ability to meet its liabilities either by borrowing or converting assets.
Apart from liquidity, a bank may also have a mismatch due to changes in interest rates as banks typically tend to borrow short term (fixed or floating) and lend long term (fixed or floating). A comprehensive In'Asset Liability Management policy framework focuses on bank profitability and long-term viability by targeting the net interest margin (NIM) ratio and Net Economic Value (NEV), subject to balance sheet constraints. Significant among these constraints are maintaining credit quality, meeting liquidity needs and obtaining sufficient capital.
An insightful view of in'Asset Liability Management is that it simply combines portfolio management techniques (that is, asset, liability and spread management) into a coordinated process. Thus, the central theme of in'Asset Liability Management is the coordinated – and not piecemeal – management of a bank’s entire balance sheet.
Although in'Asset Liability Management is not a relatively new planning tool, it has evolved from the simple idea of maturity-matching of assets and liabilities across various time horizons into a framework that includes sophisticated concepts such as duration matching, variable rate pricing, and the use of static and dynamic simulation.
- Deterministic and Stochastic modeling of the balance sheet
- Stress the balance sheet under Interest rate, currency, or economic indicator Shocks/Scenarios
- Accurately model all financial instruments on and off balance sheet
- Behavioral Modeling: Tune Customer behavior to prepayments and early redemptions
- Use behavior patterns for indeterminate maturity products