Fundamentals of Asset-Liability Management

The fundamentals of Asset-Liability Management carry a significant level of importance in the proper application of Asset-Liability Management. Asset-Liability Management can be denoted as a process, which is applied to handle the risks originating from the imbalance between the assets and liabilities of the banks.
About Fundamentals of Asset-Liability Management
Asset-Liability Management is defined as a method of risk management, which has been formulated to garner a satsifactory return at the same time keeping or preserving a more than adquate level of assets over liabilities. The fundamentals of Asset-Liability Management focus on a number of factors. Rates of interest, earning capacity, and the degree of desire to acquire debt are taken into account.
Asset-Liability Management is also termed as surplus management.
Nevertheless, over the last 10 years or so, the interpretation of Asset-Liability Management has undergone a number of developments. ALM is now being implemented in a number of distinctive methods and according to various circumstances. Originally, Asset-Liability Management was initiated by banks and other financial services providers only, but now it is also being implemented in industries to a great extent.

Conventionally, the insurance companies and banks applied accrual accounting methods for every asset and liability. The proceeds received from their liabilities were invested in assets and the valuation of every liability and asset was done on book value basis. A number of risks came up as a result of inequality between the assets and liabilities. Before 1970, this kind of imbalance was not regarded as a serious problem.

However, the scenario started to vary after 1970, when there was a trend of fluctuating rates of interest. At that time, asset management firms and banking institutions began to concentrate on Asset-Liability Risk, which is preponderantly a leveraged type of risk.
The Techniques Utilized for Analyzing Asset-Liability Risk
Following are the different techniques implemented for the analysis of Asset-Liability Risk:

• Duration Analysis
• Gap Analysis
• Scenario Analysis

Approaches Towards Asset Liability Management
Different approaches to Asset-Liability Management include the following:

• Liquidity management
• Liability management
• Asset management