Asset-Liability Management

2918 Words Jul 30th, 2009 12 Pages
Asset-Liability Management

“Asset-Liability Management (ALM) can be defined as the ongoing process of formulating, implementing, monitoring and revising strategies related to assets and liabilities to achieve an organization 's financial objectives, given the organization 's risk tolerances and other constraints”[1]. ALM also is known as balance sheet management. In banking activity the gap between assets and liabilities can bring some consequences where the following risks are arose. And as a whole it influences badly on the bank’s functioning. Solving that problem is the primary goal of ALM. The good balance sheet management means that the return on loans and securities as the highest as possible, risks are minimized and
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Also it is involved in structuring the transaction. At the same time the underwriter provides consultations in marketing and law.

Benefits and drawbacks of asset securitization

Before asset securitization was created, banks lent money to households and companies and these loans existed in the banks’ balance sheets until they mature or are paid off. This creates a mismatching of assets and liabilities because typically banks use deposits and issuance of debts as a provision of loans. And both of them have shorter period of maturity then banks’ lending especially cars and mortgages loans. Since the bank started to use securities backed by assets or in other words it started to transfer the ownership of the assets to SPVs, the great opportunities have began widely available for the bank. And the main of that fee income and additional trading opportunities are providing. Securitization is the process of transforming illiquid assts into marketable securities. This helps banks to maintain or even increase their liquidity because long-term loans are replaced to SPVs. As a consequence, the gap between balance sheet sides also is diminished. And as a result the position of the bank becomes more stable and it frees up capital to provide new loans. In other words, the opportunity for bank to lend additional funds to the consumers appears. Moreover, securitization provides quick access to funds that