Question

Discuss why some fixed assets require alms to be paid while others do not.

Answer 1

ALM stands for Asset and liability management.

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.

The practice of asset and liability management can include many factors, including strategic allocation of assets, risk mitigation, and adjustment of regulatory and capital frameworks. By successfully matching assets against liabilities, financial institutions are left with a surplus that can be actively managed to maximize their investment returns and increase profitability.

Traditionally, financial institutions managed risks separately based on the type of risk involved. Yet, with the evolution of the financial landscape, it is now seen as an outdated approach. ALM practices focus on asset management and risk mitigation on a macro level, addressing areas such as market, liquidity, and credit risks.

Assets require ALM because of following reasons

1) Assets exposed to high technological risks
One of the benefits of implementing ALM is that an institution can manage its liabilities strategically to better prepare itself for future uncertainties.

2) Reduction in cost of assets where borrowings are involved
Interest rate risk refers to risks associated with changes to interest rates, and how changing interest rates affect future cash flows. Financial institutions typically hold assets and liabilities that are affected by changing interest rates.

3) Other assets such as

■ Short and long-term minimum capital or equity/total assets goal ratios.
■ The maximum percentage of assets to be held by any one client, in different types of loans and investments, in fixed- rate investments and loans with a maturity greater than one year, and invested in fixed assets.
■ The desired diversification of savings and deposits to elimi-nate potential concentration risk (having too much in any one type of deposit or with any one client).
■ Maximum maturities for all types of loans, investments, and deposits.
■ Establishment of fixed or variable interest rate loans and deposits.
■ Pricing strategies for loans and savings products that are based on what it actually costs to offer the products and what the local market will bear.

HOWEVER few assets such as
Goodwill
Intangibles
Deposits with third parties

Usually don't require any asset liability management.