Implementing a proactive bank asset-liability management framework: the concept of “Strategic ALM”

Implementing a proactive bank asset-liability management framework: the concept of “Strategic ALM”

Changes to the industry since the crash mean that a revamped ALM industry is more and more necessary – and the biggest shift will see treasurers move from a reactive to a proactive approach, says Professor Moorad Choudhry.

As previously discussed, asset-liability management (ALM) is the core risk management discipline in banking and one that is practised by every bank, regardless of size, business model or customer franchise. But like many aspects of banking, the changes in the industry taking place since the crash demand that this most traditional of disciplines must also undergo a revamp. Best practice in ALM now requires that we move from the reactive form of ALM undertaken in most banks to a much more proactive form. This is Strategic ALM, and it’s set to become the modern, business best-practice way to conduct balance sheet risk management in banks.

Ask any practitioner what they understand by ALM and most of them will say something along the lines of the following: it represents the management of liquidity risk and interest-rate risk in a bank. More fundamentally, they will expect that the way it works is that the business lines go out and originate loans (assets) and raise deposits (liabilities), and then the mismatch in tenor and interest-rate basis of these assets and liabilities generates risk exposures that must be managed. It’s a requirement and an art as old as banking itself. Exhibit 1 is a traditional view of ALM.


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