Asset Liability Management in Commercial Banks - Coursework Example

By using the capital market approach and data from different banks, this study would help in concluding that there is a relatively positive relationship between the sizes of the banks and their exposure to the interest rate.The first part of this report discusses the general criteria of ALM and the interest rate risk. Bank’s assets and liabilities, as in the balance sheet, our future cash inflows or outflows. The interest rate risk not only affects the profitability and the asset-liability of the commercial banks but also affects the market value which leads to the liquidity risk and the changes in interest rates.

In banks, ALM is considered an important tool to monitor measure and manage the interest rate risk of a bank. It not only identifies the weaknesses and problems but also examines the ALM process that could have a gloomy effect on the credit union’s financial position. ALM is used to manage the structure of the balance sheet. The functions of ALM are:Whereas, ALCO is an important part of asset-liability management. ALCO meetings should be conducted at least quarterly to examine the bank’s exposure to the changing interest rates and also to review the level of management’s compliance with the bank’s policies; limits and ratios.

The management of assets-liability is the most important responsibility of the committee because it involves risk for depositors, who invest their money in banks, as well as for the bank itself.The banking system and their respond to the asset-liability management are examined in the later part of this paper. The exposures of Chinese’s state-owned commercial banks are higher than other banks of the countries like Hong Kong. However, it is important for the asset-liability management of commercial banks in strengthening the interest rate risk monitoring.

According to the Chinese banks, the appreciation of Renminbi tends to reduce their entity value.