Asset Liability Management in Banks
5 Asset and Liability Management (ALM)
29. There are different organizational and governance models that guide the management of bank asset and liability activities. The models reflect fundamentally different risk philosophies that tend to evolve with the growing sophistication and depth of financial markets together with the position and activities undertaken by a bank in the market. The terms ‘ALM unit’ and ‘treasury unit’, can be confusing as they are often used by organizations who assign different responsibilities to them - this will be explained below.
5.1 Key aspects that influence a banks approach
30. The evolution of models is driven by differing philosophies about the role of the treasury or the
ALM unit and banks in markets at different stages of development often regard the treasury unit differently. 31. In emerging markets the treasury function is usually simplistic and a support function mainly focused on liquidity management and basic foreign exchange activity. In these banks, it is not uncommon to have a prohibition on involvement in more sophisticated capital markets transactions such as derivatives due to lack of knowledge and suspicion about the instruments.
Such markets can suffer from poorly developed capital markets that provide little capacity to offset the risks assumed from the customer franchise. The result is often that these banks are slow to evolve and run risks, without knowing it, which can threaten their very survival.
32. In developing markets the treasury function usually begins to take on more structure, more activities and a broader mandate. At the simpler end of the spectrum it can assume full balance sheet management responsibility, involving itself in more complex analytics and hedging activities. At the more complex end it can assume trading and market making responsibilities for a range of capital market products that are used in hedging but also are provided to customers. This can often be referred to
29. There are different organizational and governance models that guide the management of bank asset and liability activities. The models reflect fundamentally different risk philosophies that tend to evolve with the growing sophistication and depth of financial markets together with the position and activities undertaken by a bank in the market. The terms ‘ALM unit’ and ‘treasury unit’, can be confusing as they are often used by organizations who assign different responsibilities to them - this will be explained below.
5.1 Key aspects that influence a banks approach
30. The evolution of models is driven by differing philosophies about the role of the treasury or the
ALM unit and banks in markets at different stages of development often regard the treasury unit differently. 31. In emerging markets the treasury function is usually simplistic and a support function mainly focused on liquidity management and basic foreign exchange activity. In these banks, it is not uncommon to have a prohibition on involvement in more sophisticated capital markets transactions such as derivatives due to lack of knowledge and suspicion about the instruments.
Such markets can suffer from poorly developed capital markets that provide little capacity to offset the risks assumed from the customer franchise. The result is often that these banks are slow to evolve and run risks, without knowing it, which can threaten their very survival.
32. In developing markets the treasury function usually begins to take on more structure, more activities and a broader mandate. At the simpler end of the spectrum it can assume full balance sheet management responsibility, involving itself in more complex analytics and hedging activities. At the more complex end it can assume trading and market making responsibilities for a range of capital market products that are used in hedging but also are provided to customers. This can often be referred to