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In banking, asset and liability management is the practice of managing risks that arise due to mismatches between the

assets and liabilities (debts and assets) of the bank. This can also be seen in insurance. 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. Modern risk management now takes place from an integrated approach to enterprise risk management that reflects the fact that interest rate risk, credit risk, market risk, and liquidity risk are all interrelated. The Jarrow-Turnbull model is an example of a risk management methodology that integrates default and random interest rates. The earliest work in this regard was done by Robert C. Merton. Increasing integrated risk management is done on a full mark to market basis rather than the accounting basis that was at the heart of the first interest rate sensivity gap and duration calculations.

but. Haslem et al (1999) used canonical analysis and the interpretive framework of asset/liability management in order to identify and interpret the foreign and domestic balance sheet strategies of large U. In particular. In the past Indian banks were primarily concerned about adhering to statutory liquidity ratio norms. yet they emphasize domestic balance sheet (asset/liability) matching strategies. Their text provided the foundation of subsequent discussion on asset-liability management. the market value of liabilities changed very little from year to year. but in the changed situation. stocks. namely moving away from administered interest rate . after interest rates were deregulated in 1979. Managing assets and liabilities is a concern for banks.S.” Their study found that the least profitable very large banks have the largest proportions of foreign loans. One of the key motivators of asset-liability management worldwide was the Basel Committee. Empirical evidence suggests that asset allocation is the most important factor in determining investment performance. the Basel II norms (2004) were proposed as an international standard for the amount of capital that banks need to set aside to guard against the types financial and operational risks they face. cash and real estate considering the legal and policy constraints facing the institution. Strategic investment planning is the allocation of portfolio across broad asset classes such as bonds. Conversely. AS a part of banks’ strategic planning and as a response to the changing environment in prudential supervision. Generally speaking. the most profitable very large banks have the smallest proportions of foreign loans.LITERATURE There is a considerable literature addressing asset-liability management in banks. Basel II proposed setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. Vaidyanathan (1999) discussed issues in asset-liability management and elaborates on various categories of risk that require to be managed in the Indian context. However. these rules mean that the greater risk to which the bank is exposed. they emphasize foreign balance sheet matching strategies. they showed much more volatility. pension funds and insurance companies. banks in the context of the “crisis in lending to LDCs. e-commerce and new taxation treaties. nonetheless. This lead the institutional investors mentioned above to consider assets and liabilities simultaneously during their strategic planning. Before the deregulation of interest rates. This would ultimately help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. The Basel Committee on Banking Supervision (2001) formulated broad supervisory standards and guidelines and recommended statements of best practice in banking supervision. The purpose of the committee was to encourage global convergence toward common approaches and standards.

while in 1992. so that assetliability management was essential.e. in order to immunize themselves against interest rate risk. especially with respect to FOREX transactions. They found that SBI and associates had the best asset-liability management in the period 1992-2004. thus in turn requiring efficient asset-liability management practices. as it would enable the bank to maintain its exposure to foreign currency fluctuations given the level of risk it can handle. He also found that an increasing proportion of investments by banks was being recorded on a marked-tomarket basis.structure to market determined rates. with tools that can allow private bankers to analyse the situation of high net worth individuals operating offshore or in multiple tax jurisdictions. Also. For instance. The study covers all scheduled commercial Taking an asset-liability management approach to private wealth management Author: Lionel Martellini Source: Hedge Funds Review| 11 Jan 2010 Topics: Risk management. Wealth management. there is an increasing possibility that the risk arising out of exposure to interest rate volatility would be built into the capital adequacy norms specified by the regulatory authorities. other than foreign banks. namely the maturity period for term deposits. Vaidya and Shahi (2001) studied asset-liability management in Indian banks. He found that several banks had inadequate and inefficient management systems. Risk. Vaidyanathan argues that the problem gets accentuated in the context of change in the main liability structure of the banks. Asset allocation While the private banking industry is in general relatively well equipped on the tax planning side. The present study analyses asset-liability management in Indian banks using the methodology of Ranjan and Nallari (2004). thus being exposed to market risks. as bank profitability focus has increased over the years. Private banks were found to be aggressive in profit generation. in 1986. only 17% of term deposits were more than five years whereas 38% were less than two years (Vaidyanathan. Ranjan and Nallari (2004) used canonical analysis to examine asset-liability management in Indian banks in the period 1992-2004. They suggested in particular that interest rate risk and liquidity risk are two key inputs in business planning process of banks. less than two years for all commercial banks. He also suggested that. They also found that. all other banks could be said to be liabilitymanaged. 1995). nearly 50% of term deposits had a maturity period of more than five years and only 20%. Private bank. i. the software packages used on the . it became important for banks to equip themselves with some of these techniques. they all borrowed from the money market to meet their maturing obligations. he argued that Indian banks were more exposed to international markets. while nationalized banks were found to be excessively concerned about liquidity.

Defining Asset-LiabilityDefining AssetLiability Management by Adaptive Co-management. These concepts. Issue: 919. as opposed to myopic. In most of the recent models. Social Science Research Network (2007) Volume: No.University of Karlsruhe. 12970. We find that preventive measures. We also show that financial reporting rules have real effects on investment behavior. To understand Redington’s framework. Passive Adaptive Management The ideas of ALM can be traced back to the seminal work of Redington (1952) in which he suggested that there should be an equal and parallel treatment of assets and liabilities in actuarial valuation. School of Economics. The validity of the Gaussian assumption in scenario generation is questioned. Svetlozar Rachev and Yesim Tokat Institute of Statistics and Mathematical Economics. decision making. Kollegium Abstract Asset and liability management is the simultaneous consideration of assets and liabilities in strategic investment planning. and related issues are discussed in this chapter. . and stable Paretian distribution is suggested as an alternative hypothesis. Publisher: SSRN We study the impact of regulations on the investment decisions of a defined benefits pension plan. These have become the main tools of ALM. tend to decrease the gains to dynamic investment. induces grossly suboptimal investment decisions. as opposed to at current yields. The asset and liability management models in the literature are reviewed with an emphasis on the recently developed approaches. such as Value-atRisk constraints. punitive constraints. the development of ALM. lead to very large utility gains from solving the dynamic program. the current requirement to discount liabilities at a rolling average of yields. This led him to the concept of duration and to the introduction of the technique known as immunization.financial simulation side often suffer from significant limitations and cannot satisfy the needs of a sophisticated clientele. In contrast. consider a block of insurance business as a set of cash flows. We assess the influence of ex ante (preventive) and ex post (punitive) risk constraints on the gains to dynamic. the uncertainty is described by a representative set of scenarios. For example. such as mandatory additional contributions from the sponsor when the plan becomes underfunded.

Null M Germano. Null M Villaverde Strategic asset-liability management is a primary concern in today's banking environment.Global asset liability management by Null M A H Dempster. This approach can be used to formulate. test. Null E A Medova. . we present a methodology to assist in the process of asset-liability selection in a stochastic interest rate environment. In our approach. for randomly generated interest rate scenarios. We present results of applying this methodology to data from the Federal Home Loan Bank of New York. market value and duration of capital. In this paper. a quadratic optimizer is embedded in a simulation model and used to generate patterns of dividends. and refine asset-liability strategies.

It helps to assess the risks and manage the risks by taking appropriate actions. websites and various journals. justification of Research In present scenario. circulars of the ICICI Bank. company websites. So. to understand the ALM process and various strategies that are helpful for the banks to manage the market risk. books. Research Objectives Following are the main objectives of the research:    To explore theoretical and practical aspects of asset liability management in banking industry To identify the asset liability management strategies in context of HSBC bank To recommend a framework to mitigate risk through ALM . Gap Analysis Technique (prescribed by RBI) has been used for measuring the interest rate risk.Research Methodology The secondary data were collected from the annual reports of ICICI Bank. Potential Information Sources In this research. functions and practical aspects through case study of HSBC bank. Along with this.reading material on ALM provided by the Bankers Staff College. ALM is important for the banking industry due to deregulation of interest regime. journals. In this study. annual report of the company and other reliable and authentic sources will be used to collect secondary data and information. this topic is selected. it would be beneficial for me to develop my knowledge regarding the ALM process. articles. research paper.