ALM within a Constrained Balance Sheet

Andreas Bohn, Paolo Tonucci

Asset and liability management (ALM) can be defined as the measurement of the structural and banking book risks on the balance sheet, the forecasting of those risks under different market assumptions and the actions taken to manage those risks. This should include the following risk types:

  • maturity transformation, which creates both refinancing risk and interest rate risk;

  • behavioural risk, which is measured as the potential deviations in customer behaviour from modelled assumptions and generates both refinancing and interest rate risk;

  • structural risk, which reflects the interest rate exposure generated from longer term structural exposures on the balance sheet;

  • basis risks arising from products fixing against different interest rate benchmarks such as base rates, overnight index rates or term interbank offered rates.

ALM strategies represent the ways in which the risk is managed once the form of measurement has been determined. The increase in the sophistication and extent of liquidity risk management, as well as the impact of other regulatory driven change, has resulted in these risks having to be managed with an understanding and appreciation of the potentia

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