Asset Liability Management
Asset Liability Management (ALM) was pioneered by financial institutions as they faces mismatched asset and liability risks. Because the firms’ capital is relatively small compared to the size of the assets and liabilities, small changes in the assets and/or liabilities can lead to significant changes to their capital. The problem is not whether the asset would fall, or liability would increase but rather, whether or not the capital would be depleted.
Following the footsteps of insurance regulations, banks are now required to have minimum capital requirements based on their corresponding risks such as those required under Basel II.
The Real Consulting difference
Traditional ALM techniques include gap analysis and duration matching analysis. Unfortunately, these techniques are no longer sufficient due to the availability of derivative instruments such as swaps and options or embedded options in the underlying asset or liabilities.
While some companies are satisfied with running a number of scenario analysis (stress test analysis), we offer a much more comprehensive ALM solution through the use of advanced risk simulation. Through the simulation processes, we can quantify the risk of asset / liability mismatch, and the amount of capital required in order to achieve a certain level of confidence. Then we help our clients to construct strategies to reduce their risks and thereby reduce their capital requirements.