8 Costly Risks in Asset Liability Management

Developing a complete ALM process (modeling, reporting and strategy development and decision making) has always been a daunting task, and with all of the regulatory emphasis, focus and guidance, including the issuance of the 2010 Interagency Advisory on Interest Rate Risk Management and the Interagency Policy Statement on Funding and Liquidity Risk Management, the task has only become more difficult.

At DCG, we view the ALM model as the foundation upon which strategy development is built. If the foundation is weak, the entire ALM structure is in jeopardy. Once a model accurately reflects the current risk profile (a process that is difficult and time consuming initially and one that needs to continuously be managed), the process of using that information should come to the forefront. However, even the best information becomes useless if not expressed in a manner that makes it fully understood by the key stakeholders or if used incorrectly.

How does your institution view ALCO? Is it a regulatory appeasement exercise performed only to “check off the box” or is true value assigned to the modeling process? Are decisions made and strategies implemented?

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