Summary
Asset and liability management sits between market and liquidity risk and is often the least coherently governed area of the balance sheet. This article outlines what a coherent ALM framework looks like.
Scope
ALM covers structural interest-rate risk, funding and liquidity risk, and structural FX risk. It also covers the balance-sheet consequences of business decisions taken elsewhere in the firm.
Measurement
EVE and NII sensitivities to defined rate shocks, funding gap analysis, and behavioural modelling of non-maturity deposits and prepayments are the core measures. Each has assumptions that must be transparent.
Hedging
Hedging decisions should be governed by ALCO against a defined appetite. Ad-hoc hedging in response to point-in-time volatility is a common source of unintended risk.
Behavioural modelling
Non-maturity deposit models, prepayment models and pipeline models are model-risk-managed like any other model — inventoried, validated and monitored.
Governance
ALCO effectiveness depends on its remit, membership, information and cadence. Where ALM decisions are effectively taken in Treasury and rubber-stamped by ALCO, the governance is nominal.
Limitations
ALM is a balance-sheet discipline, not a P&L optimisation exercise. Framing it as the latter tends to embed risk.
Related expertise
Frequently asked questions
What should risk leaders know about scope?
ALM covers structural interest-rate risk, funding and liquidity risk, and structural FX risk. It also covers the balance-sheet consequences of business decisions taken elsewhere in the firm.
What should risk leaders know about measurement?
EVE and NII sensitivities to defined rate shocks, funding gap analysis, and behavioural modelling of non-maturity deposits and prepayments are the core measures. Each has assumptions that must be transparent.
What should risk leaders know about hedging?
Hedging decisions should be governed by ALCO against a defined appetite. Ad-hoc hedging in response to point-in-time volatility is a common source of unintended risk.
What should risk leaders know about behavioural modelling?
Non-maturity deposit models, prepayment models and pipeline models are model-risk-managed like any other model — inventoried, validated and monitored.
What should risk leaders know about governance?
ALCO effectiveness depends on its remit, membership, information and cadence. Where ALM decisions are effectively taken in Treasury and rubber-stamped by ALCO, the governance is nominal.