Risk, Asset and Liability Management in Banking: Conceptual and Contemporary Approach

Abstract

The main determinants of bank profitability is the net interest margin. Although the net interest margin is an important component of bank profitability, it is also important to manage assets, liabilities and risks such as market interest rates, exchange rates, credit risk effectively and efficiently. Risk management (RM) requires an effective asset and liability management (A&LM). (A&LM) is the effective arrangement, planning and management of the bank balance-sheet in order to achieve the goal of maximum profitability, stable and sustainable growth by taking risk and liquidity principles in banking as reference. (A&LM) includes the management of assets and cash flows in order to meet the liabilities of the changing conditions in the economy and financial markets, and the distribution of funds realised from various sources to obtain the highest resource efficiency. It is a way of risk management, which aims to reduce banks’ failure to fulfil their liabilities and to increase their profitability. Although RM in banks is not an (A&LM) but they complement each other in terms of increasing market value, sustainability and performance of banks. In this context, the aim of the study is to examine the risks (of credit, market, liquidity, operational) in the banking sector (A&LM), together with techniques used in (A&LM). In this regard, Basel III, developed by the Basel Committee for the purpose of helping banks in management of potential risks, and one of the most important regulations for banks’ capital adequacy, planning of liquidity and reducing systemic risk and preventing or resolving financial crises in a systematic and conceptual approach would be explored.KeywordsBankingAsset and liability managementRisk managementDerivativesBasel IIIValue at riskCAMEL approachNet interest marginFunds transfer pricingBreak-even point