Asset And Liability Management (ALM)

In most of the bank's assets and liabilities management aims to manage interest rate risk on bank balance sheets and ensure that the interest rate risk inherent in the bank's business does not disturb the stability of bank earnings.
Source of bank income is reflected from the Net Interest Income is the difference between lending rate and interest rate funds. Current Value / Net Present Value of the NII is the main contributor of the goal to stabilize the NII can be said also to stabilize the business value (this description commonly used in America).
The emphasis of a bank on both goals often depends on accounting management conducted → whether the report reflects the bank's management primarily from income or value. Management accounting consists of a reporting structure based on financial information that reflects the way the business at the bank management. On the other hand reports as provided by law like the report Income statement and balance sheet must be in accordance with the standards and laws of national accounting standards. Management accounting, are often influenced by the standards of financial reporting where the bank stands.
The main risks that can occur in ALM are: interest rate in the banking book and liquidity risk.

Interest Risk in the Banking Book
Banking book market risk: the risk of losses faced by banks to changes in market prices as a result of the bank's business structure, such as: activity and accumulation fund loans.
Interest rates in the banking book: the risk of loss due to changes in interest rates, generally the result of the bank conducted business with commercial and retail customers.
Interest risk in the banking book are not tercover in detail on Basel II. But in July 2004, a month after the Basel Committee published the "International Convergence of Capital Measurement and Capital Standards: a Revised Framework", Basel Committee published the "Principles for the Management and Supervision of Interest Rate Risk".

Activities assets and liabilities management
ALM is not just to manage risk and stabilize the business value, but also:
- Maintaining the desired liquidity structure of the bank's business
- Other things that may affect the shape and structure of bank balance sheets
- Things that can affect the stability of income every time
There are many things that can cause it needs a balance between structure and form of a bank's balance sheet, where it is a lot to do with the problems caused by international banks that have a capital structure that is dominated by the currency of their country, but income and assets and the form of eye pasivanya Other money. This led to foreign exchange risk to the bank earnings.
ALM managers should be aware that:
- Balance of a commercial bank does not consist of assets and liabilities are stable (because there are deposits and new loans or maturing)
- Repricing assets and liabilities on the bank's balance sheet is not always contractual (often there is a significant time difference between the market price changes and changes in interest rates applied to customers)
- Almost no correlation between retail product and wholesale prices to assess the assets and liabilities (a lot of marketing issue, which affects the assessor retail product but does not affect wholesale products)
- Retail products often things that are not rational (retail customers often have the right to decide the contract in different conditions than the wholesale market)
Some of the reasons why commercial banks with a number of retail customers are more difficult to manage the form and structure of its balance sheet, such as:
- Commercial banks usually consider good relations with customers, not only based on just kontral → customer focused
- Features of retail products are often different from the wholesale products that are hard to sell products in the wholesale market or difficult to manage risks by using wholesale products