Treasury and Asset Liability Management

ALM – a hot topic for 150 years

Asset Liability Management (ALM) is considered by some to be a tedious topic.This can clearly be attributed to its long tradition in the banking sector, dating back to the theoretical principles developed during the century before last.

• 1854: The golden rule of banking coined by Otto Hübner (assets and liabilities should not have mismatched maturities)
• 1857: The deposit base theory (Bodensatztheorie) developed by Adolph Wagner (difference between the maturity and termination of a deposit)
• 1879: The realisation theory of Carl Knies (use of marketable assets to settle outstanding liabilities),which is referred to nowadays mostly as the "Shiftability Theory" according to Moulton (1918)

Despite the longstanding tradition of ALM, adequately putting it into practice and finding the right methods continue to present challenges.New economic framework conditions have to be adapted, and new innovative products, with which the market often has little in the way of experience, have to be integrated. The recent subprime crisis has shown that, even after 150 years, ALM is still in need of further development.

ALM – an integral part of bank-wide management

A number of key aspects of bank management can be placed under the term ALM:

• Interest rate risks and interest income management
• Liquidity risks and the minimisation of liquidity costs
• Funds transfer pricing (FTP) or market interest rate method

Adequate asset liability management therefore requires a bank-wide view of operations at all times.However, it is vital that this view not only incorporates the entire balance sheet (as the term suggests) but also all off-balance sheet items.

A particular challenge in this regard is how (i.e. what method and system should be used) to map and combine a bank's entire transactions in one uniform architecture.This is why the way of viewing operations that is so essential for the purposes of bank-wide management is already inherent in asset liability management.

ALM – an issue also for industry

Traditionally speaking, ALM has been most widespread in the banking and insurance sector.Over the last few years, however, ALM issues have also become increasingly important for companies in general.To date, these issues have mainly related to interest rate and currency risk management, with the definition of what constitutes an adequate liquidity reserve also gaining more and more significance.
A primary concern for international companies striving for successful asset liability management is setting up an expedient cash-pooling system.

The underlying challenge in this regard is adapting the tried-and-tested methods prevailing in the financial sector for use in industrial companies,the need for adapting these methods stemming from the fundamental differences in balance sheet structure and management approaches.The asset side of a bank's balance sheet, for example, mainly comprises clearly defined products (the behaviour of which is generally predictable), whereas the assets of industrial companies are dominated by long-term investments in production plants, the behaviour of which is more difficult to estimate.

ALM – current developments

Due to the prevailing situation on the capital markets, the spotlight is currently on liquidity risks,primarily on the interaction between refinancing and market liquidity risks.

Back in January 2007, a new regulation regarding the liquidity of banks (Liquiditätsverordnung – LiqV) came into force in Germany, in particular giving banks freedom to use internal models for regulatory reporting and thereby harmonise the internal and external management of liquidity risks.

At the beginning of 2008, a number of studies on liquidity risks were published.These activities underpin the continued attention being paid to this issue that is therefore likely to remain a hot topic over the coming years.

ALM – what we can do for you

How advanced is your asset liability management?What stress scenarios have to be considered?Are new business effects and customer behaviour taken into account on a dynamic basis? How high is the required liquidity reserve for your institution?
Why not clarify all these issues together with our experts.Our extensive experience in the treasury and ALM activities of banks, insurance companies, funds and industrial companies enables us to offer you:

• Quick checks of your models and processes by our experienced experts
• Development of models for internal management and regulatory reporting
• Selection of suitable analysis and reporting software
• Implementation of models in your system architecture
• Development of an integrated reporting system

Take advantage of our longstanding experience in treasury and asset liability management.
For more detailed information on our approaches and credentials, please do not hesitate to contact us.

Your contact:

Dr Oliver Hein

Tel.: +49 69 90737-324