Asset liability management abbreviated as ALM is referred to as the administration of several policies, procedures, and methods that address all the financial risks which are associated with the dynamic interest rates, foreign exchange rates and several other factors that directly or indirectly affect the liquidity of a bank or any other institutions.
ALM is an integral part of the management of all the financial processes which follow a risk management technique that arises due to the mismatch between the assets and the liabilities. The asset liability management process requires consistent and effective strategic planning for the intention with which it has been planned.
Functions of ALM
ALM aims to perform some functions which are as mentioned below –
- Firstly, it ensures sufficient liquidity while maintain and managing a proper balance between the interest that is earned and the interest that is spent.
- Secondly, it approves an appropriate contingency plan which is extremely beneficial.
- ALM helps to review and eventually approve the funds management policy & liquidity on a regular basis to present a clear picture of the existing financial condition.
- It helps in the creation of a link with the funding policies with the sources and needs through a perfect blend of liabilities or the sale of assets.
Hence, it can be very well understood that how vital is ALM for any financial institution.