What is Asset Liability Management in Banking

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A bank is a financial intermediary that collects funds from depositors and lends the funds to others at a higher rate than it pays to depositors (this is the net interest margin). • Historically, you could calculate a bank’s profit as follows: • interest earned from borrowers – interest paid to depositors = bank profit • To increase profit, banks focused on funding their activities at the lowest possible cost. • But the banking industry has changed significantly. • Loans used to account for nearly all of a bank’s revenue; today, banks generate additional income from investments in securities, speculation with derivatives, and other sources. While deposits used to be the primary source of funds, banks now obtain funds with short- and long-term borrowing, securitizations, and collateralized borrowings. • These changes brought new types of risk. Unfortunately, many banks failed to manage these risks, and some banks became insolvent or required a bailout during the 2008 financial crisis. The banking industry has evolved, however, and banks now manage these risks with asset-liability management (ALM). • ALM is the process of matching assets and liabilities to manage risk; specifically, to protect against adverse changes to the bank’s profit, firm value, and liquidity. • Banks carry out ALM by optimizing the following gaps: • • The earning gap • • The duration gap • • The cash flow gap • • The liquidity gap • — • Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world. • — • SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS: • • A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING • • A 44-PAGE GUIDE TO U.S. TAXATION • • A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS • • MANY MORE FREE PDF GUIDES AND SPREADSHEETS • http://eepurl.com/dIaa5z • — • SUPPORT EDSPIRA ON PATREON • * / prof_mclaughlin • — • GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT • https://edspira.thinkific.com • — • LISTEN TO THE SCHEME PODCAST • Apple Podcasts: https://podcasts.apple.com/us/podcast... • Spotify: https://open.spotify.com/show/4WaNTqV... • Website: https://www.edspira.com/podcast-2/ • — • GET TAX TIPS ON TIKTOK • / prof_mclaughlin • — • ACCESS INDEX OF VIDEOS • https://www.edspira.com/index • — • CONNECT WITH EDSPIRA • Facebook: / edspira • Instagram: / edspiradotcom • LinkedIn: / edspira • — • CONNECT WITH MICHAEL • Twitter: / prof_mclaughlin • LinkedIn: / prof-michael-mclaughlin • — • ABOUT EDSPIRA AND ITS CREATOR • https://www.edspira.com/about/ • https://michaelmclaughlin.com

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