Asset Liability Management
Asset Liability Management (ALM) is used by companies to balance their assets and liabilities, generally in a way that liabilities can be served with a given (high) probability. This may include simple gap analysis techniques to minimize exposure to interest-rate risk, foreign exchange risk and liquidity risk. In special cases ALM includes considerations whether to pay for a large asset (e.g. a firm) with cash, shares or issuing a bond.
In financial institutions and insurances ALM-techniques generally involve actions on both sides of the balance sheet to narrow the asset-liability mismatch risk, which is highly leveraged since both asset and liability values generally exceed the equity of a financial institutions. Deviations from a risk minimal position are then taken consciously in accordance with the desired risk-return profile.
The main techniques of ALM are to minimize the mismatch between assets and liabilities either by duration, fx-analysis or liquidity gap analysis, or more generally using different possible future scenarios for a broad range of risk drivers. Some techniques involve a Replicating Portfolio that translates liabilities into negative holdings of synthetic or tradable assets. ALM development is driven by important changes in the fields of risk management, accounting and supervision and is being used for a broad range of purposes, such as strategic planning, solvency testing and risk-based capital calculations.
When ALM decisions are derived from multiperiodic optimization of the firm value, we tend to talk about Strategic Asset Liability Management.
Benoist & Company has broad experience in developing suitable ALM models for many different purposes: to assess and mitigate asset liability mismatch risk, to support investment decisions, to optimize economic capital coverage, solvency and financing costs etc.