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Asset-Liability Management (ALM) is one of the most significant aspects of risk management in banks. It refers to the process of managing a bank's assets and liabilities in such a way that the institution maintains adequate liquidity, earns satisfactory profits, and minimizes various financial risks. Since banks primarily borrow funds in the form of deposits and lend these funds as loans and investments, they constantly face the challenge of balancing profitability with risk. This is why Asset-Liability Management is often regarded as a balancing act between profitability and risk. A bank that focuses only on profitability may expose itself to excessive risk, while a bank that gives excessive importance to safety may sacrifice earnings and shareholder value. Therefore, effective ALM aims to achieve an optimal balance between these two objectives. Banks operate by accepting deposits from customers and extending loans to borrowers. The deposits generally have shorter maturities and can be withdrawn on demand or after a short notice, whereas loans are often granted for medium or long-term periods. This mismatch between the maturity of assets and liabilities creates various risks, including liquidity risk, interest rate risk, market risk, and foreign exchange risk. ALM provides a systematic framework to identify, measure, monitor, and control these risks while ensuring that the bank remains profitable. The balancing act begins with liquidity management. Liquidity refers to the ability of a bank to meet its financial obligations as they become due without incurring unacceptable losses. A highly liquid bank maintains sufficient cash and liquid assets to satisfy withdrawal demands and lending commitments. However, liquid assets such as cash and government securities usually generate lower returns than loans and long-term investments. Therefore, if a bank keeps too much liquidity, its profitability declines because a substantial portion of its resources remains invested in low-yield assets. On the other hand, maintaining insufficient liquidity may expose the bank to funding shortages, reputational damage, and even insolvency during periods of financial stress. ALM helps determine the optimum level of liquidity that balances profitability with safety. Interest rate risk is another major concern addressed through ALM. Banks earn income from the difference between interest received on loans and investments and interest paid on deposits and borrowings. This difference is known as _______ __________ ___ ________ ____.
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