Principles for the Control of Asset Liability Management Strategies in Banks and Insurance Companies

Abstract

Asset and Liability Management (ALM), which is sometime referred to as Balance Sheet Management (BSM), can be viewed as a process whereby a bank’s total assets and liabilities are controlled and managed simultaneously, in an integrated fashion. ALM is often considered as an instrument for medium and long term action. In this way, it may be seen as a complement to liquidity management, which concerns the short term action. ALM combines the traditional activities of Asset Management (“asset allocation”) and Liability Management (“liability choice”). Asset Management concerns many different research areas like reserve management and portfolio choice models. (Portfolio choice includes “direct control” of assets, involving the selection of short term cash management assets to long maturity equity and debentured investments, as well as matters of “indirect control”, e.g. pricing of selected assets.) Liability Management includes subjects like deposit modeling and capital structure. ALM has been used mainly for the management of risk, but there is, as well, a growing interest among banks to use them for the management of return.