Question

Liability management plays a critical role in the risk - return profile of banks. In the present deregulated environment, banks have to balance profitability and risks while deciding on their liability mix. As a banking student, evaluate the above statement.

Answer 1

1. Asset Liability Management is the dynamic process of adjusting bank liabilities i.e. volume of deposits in order to meet demands for loans, ensuring liquidity position and fulfilling safety requirements. It is totally different from the general acceptance of deposit (i.e. liabilities) from the public for carrying out intermediation and maturity transformation into assets on regular basis. ALM is an approach through which the banks can expect asset growth by adjusting liabilities accordingly to fulfill their needs. Therefore, Asset and Liability Management has become a very important bank management approach. The ultimate goal of ALM is ensuring bank profitability and long term viability of business.

2. Along with management of the risks ALM should optimize the net worth of the bank through appropriate matching of assets and liabilities of the balance sheet. If the institution is more leveraged, the implementation of ALM will be more critical.

3. Assessment of the liquidity Gap and managing the Gap by adjusting the residual surplus or deficit balance is the major task of liquidity management. A bank should adjust its surplus/deficit to meet the liquidity Gap. While surplus funds can be invested in short/long term securities depending on the bank's investment policy, short- falls can be met either by disinvesting securities or by borrowing funds

3.