In banking, asset liability management is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank.Banks face several risks such as the
liquidity risk,
interest rate risk,
credit risk and
operational risk. Asset Liability management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk faced by Banks, other financial services companies and corporations.Banks manage the risks of
Asset liability mismatch by matching the assets and liabilities according to the maturity pattern or the matching the duration, by hedging and by securitization. Much of the techniques for hedging stem from the delta hedging concepts introduced in the
Black-Scholes model and in the work of
Robert C. Merton and
Robert A. Jarrow. The early origins of asset and liability management date to the high interest rate periods of 1975-6 and the late 1970s and early 1980s in the United States. Van Deventer, Imai and Mesler (2004), chapter 2, outline this history in detail.
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