asset liability management
The process of managing risks from mismatches between a financial institution's assets and liabilities, including interest rate, liquidity, and currency risks.
Example
“The bank's asset liability management committee convened weekly to review duration gaps and funding mismatches.”
Memory Tip
ALM = make sure assets and liabilities MATCH in duration, currency, and rate type.
Why It Matters
Asset liability management helps ensure that financial institutions can meet their obligations to depositors and borrowers while maximizing returns. For personal finance, understanding this concept helps you appreciate why banks manage their operations carefully and why interest rates and loan availability can change based on broader economic conditions.
Common Misconception
Many people believe that banks simply lend out all deposits immediately to earn interest. In reality, banks must carefully balance short-term liabilities like checking accounts against longer-term assets like mortgages, managing the risk that depositors withdraw funds before loans mature.
In Practice
A bank accepts deposits of 100 million dollars with an average maturity of 2 years, but lends out 80 million dollars in 30-year mortgages at fixed rates. If interest rates rise significantly, the bank faces a mismatch risk because depositors may demand higher rates on new accounts while the bank remains locked into low rates on mortgages, reducing profitability.
Etymology
ASSET (owned resources) LIABILITY (owed obligations) MANAGEMENT. Managing the MATCH between ASSETS and LIABILITIES.
Common Misspellings
Protect your assets with the right insurance
Related Terms
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See Also
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