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Asset-Liability Management (ALM)

Asset-Liability Management (ALM) is the process of managing the structural balance sheet risks arising from mismatches between a bank's assets (loans, investments) and liabilities (deposits, borrowings). The ALM function sits within Treasury and reports to the Asset-Liability Committee (ALCO).

📌 Key Risks Managed​

RiskDescription
Interest Rate Risk in the Banking Book (IRRBB)Risk that changes in interest rates affect net interest income (NII) or economic value of equity (EVE)
Liquidity RiskRisk of being unable to meet obligations as they fall due
Funding RiskRisk of not being able to refinance maturing liabilities at acceptable cost
Basis RiskRisk from imperfect correlation between asset and liability rate indices
Repricing RiskMismatch in timing of asset and liability rate resets

🏛️ Governance Structure​

  • ALCO (Asset-Liability Committee): Governed by the bank's approved terms of reference; sets ALM policy and limits and meets at the defined frequency
  • Treasury ALM Desk: Executes hedges, manages the structural book, monitors limits daily
  • Risk Management: Independent oversight; measures and reports IRRBB and liquidity metrics
  • Internal Audit: Periodic review of ALM framework and controls

🛠️ ALM Workflow​

Monthly ALCO Cycle

  1. Treasury compiles balance sheet projection — expected loan growth, deposit runoff, new funding
  2. Risk prepares IRRBB reports: NII and EVE sensitivity under prescribed and internal interest-rate shock scenarios
  3. Liquidity reports prepared: LCR, NSFR, internal stress tests
  4. ALCO reviews reports, approves limit utilisation, and decides on hedging actions
  5. Decisions documented in ALCO minutes; actions tracked to completion

Hedging Execution

  1. ALM desk identifies mismatch (e.g. fixed-rate loans funded by floating-rate deposits)
  2. Hedge instrument selected (interest rate swap, cross-currency swap, FX forward)
  3. Hedge executed with Treasury counterparty or external bank
  4. Hedge designated and documented for hedge accounting (if applicable) under FRS 109
  5. Effectiveness tested monthly; ineffective portions recognised in P&L

🧮 Key Metrics​

Net Interest Income (NII) Sensitivity

NII Sensitivity = Change in NII for a given interest rate shock scenario

Example: +100bps parallel shift
Fixed-rate assets reprice slowly; floating-rate liabilities reprice immediately
NII impact = Sum of (Asset repricing gap x rate change) - Sum of (Liability repricing gap x rate change)

Economic Value of Equity (EVE)

EVE = Present Value of Assets - Present Value of Liabilities

EVE Sensitivity = Change in EVE under rate shock
Measures long-term balance sheet vulnerability

Example: EVE = SGD 4.2B at current rates
Under +200bps shock: EVE = SGD 3.8B → EVE sensitivity = -SGD 400M

Repricing Gap

Repricing Gap = Rate-Sensitive Assets - Rate-Sensitive Liabilities (within a time bucket)

Positive gap: Asset-sensitive; NII rises when rates rise
Negative gap: Liability-sensitive; NII falls when rates rise

Example (0–3 month bucket):
RSA = SGD 10B, RSL = SGD 12B → Gap = -SGD 2B (liability-sensitive)

Net Stable Funding Ratio (NSFR)

NSFR = Available Stable Funding (ASF) / Required Stable Funding (RSF) x 100%

The applicable regulatory minimum and transitional treatment depend on the institution and current MAS requirements.

ASF: Stable deposits, long-term debt, capital
RSF: Loans, investments, undrawn commitments

📋 Regulatory Requirements​

  • Applicable MAS liquidity requirements, including LCR and NSFR requirements for institutions within scope
  • Applicable MAS and Basel IRRBB requirements, including prescribed supervisory shock scenarios and outlier tests
  • Internal limits set by ALCO for NII sensitivity, EVE sensitivity, and repricing gaps
  • Stress-testing frequency and escalation follow the approved risk-management framework
  • Transfer pricing framework: Treasury charges/credits business units for funding costs and benefits