ChapterSevenRiskManagementforChangingInterestRates:Asset-LiabilityManagementandDurationTechniques

KeyTopicsAsset,Liability,andFundsManagementMarketRatesandInterestRateRiskTheGoalsofInterestRateHedgingInterest-SensitiveGapManagementDurationGapManagementLimitationsofInterestRateRiskManagementTechniques7-2

IntroductionEvenasafinancialinstitutiontakesonrisk,itmustprotectthevalueofitsnetworthfromerosion,whichcouldresultinultimatefailureFinancial-servicemanagershavelearnedtolookattheirassetandliabilityportfoliosasanintegratedwholeTheymustconsiderhowtheirinstitution’swholeportfoliocontributestothefirm’sgoalsofadequateprofitabilityandacceptableriskKnownasasset-liabilitymanagement(ALM)Canprotectagainstbusinesscyclesandseasonalpressures7-3

Asset-LiabilityManagementStrategiesAssetManagementStrategyControloverassets,nocontroloverliabilitiesThepublicdeterminedtherelativeamountsofdeposits；Thefinancialmanagercouldexercisecontrolonlyovertheallocationofincomingfundsbydecidingwhowastoreceivethescarcequantityofloansavailableandwhatthetermsonthoseloanswouldbe.7-4

Asset-LiabilityManagementStrategiesLiabilityManagementStrategyControloverliabilitiesbychangingratesandothertermsBankersbegantodevotegreaterattentiontoopeningupnewsourcesoffundingandmonitoringthemixandcostoftheirdepositandnondepositliabilities.Controloverfundssources,thekeycontrolleverwasprice—theinterestrateandothertermsofferedondepositsandotherborrowings.7-5

Asset-LiabilityManagementStrategiesFundsManagementStrategyWorkswithbothstrategiesManagementshouldexerciseasmuchcontrolaspossibleoverthevolume,mix,andreturnorcostofbothassetsandliabilitiesinordertoachievethefinancialinstitution’sgoals.Management’scontroloverassetsmustbecoordinatedwithitscontroloverliabilitiessothat