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Asset and liability management practices were initially pioneered by financial institutions during the 1970s as interest rates became increasingly volatile.
The exact roles and perimeter around ALM can vary significantly from one bank (or other financial institutions) to another depending on the business model adopted and can encompass a broad area of risks.
ALM sits between risk management and strategic planning.
It is focused on a long-term perspective rather than mitigating immediate risks and is a process of maximising assets to meet complex liabilities that may increase profitability.
Industry wide, we have seen long-term assets as a percentage of total assets increase fairly significantly in the last 6-7 years.
This is one IRR indicator that regulators use in determining the level of risk an institution is taking on.
With rates on the rise, interest rate risk (IRR) will become an increasing issue for community banks for the foreseeable future.
Often an ALM approach passively matches assets against liabilities (fully hedged) and leaves surplus to be actively managed.Assumption Weaknesses One of the main things regulators will be looking at is the assumptions that are used in your ALM model.In the FDIC’s Supervisory Insights, it states: The use of unsupported or stale assumptions is one of the most common issues identified by examiners, Supervisory Insights adds.In this environment, even small non-complex community banks are being held to the same high modeling standards as their larger counterparts.A formal ALM model validation has become a standard regulatory request.