Integrated Asset-Liability Management: An Implementation Case Study

This chapter discusses integrated asset-liability management, a new management perspective that is evolving at the more innovative financial intermediaries in response to problems caused by the older functional management perspective. The older perspective calls for an organization to be structured into functional units (e.g., marketing, asset management, etc.), the decisions of which are coordinated by a corporate plan based on a macroeconomic forecast. Growing disenchantment with the accuracy of macroeconomic forecasting in the face of a more complex and volatile capital markets environment has led some financial intermediaries to begin implementing a new management perspective. This new management perspective, termed integrated asset-liability management (or more simply, integrated ALM) calls for an organization structured into integrated units that include all the functional activity related to a line of business. The integrated staff makes decisions regarding the product(s) in the business line with the help of computer models that represent both the assets and liabilities associated with the business line, characterize the uncertainty of the future business environment, and produce strategies for structuring the assets and liabilities of the business line in ways that are profitable across a range of alternative future environments. In short, the older functional management perspective calls for functional units to make decisions using profitability calculations based on a single-scenario planning forecast, while the newer integrated ALM perspective calls for business units to make decisions using risk-adjusted or hedged profitability calculations based on multiple-scenario projections. Alternatively, the chapter may be read as a discussion of the technical and organizational issues raised by the use of modern financial simulation