Role of ALM and treasury in banking

One of the crucial roles of the banking sector in any country is to manage risks for its customers effectively. This is important to help maintain profitability and financial stability. Banks can achieve this goal through Treasury Management and Asset-Liability Management (ALM). This blog delves deeper into these concepts and helps shed more light on the role of Asset-Liability Management in Banking and how it helps reduce the interest rate, liquidity, and market risks for banks. 

What is asset-liability management in banking?

Asset-liability management in banking refers to a risk management process banks commonly use to balance assets and liabilities. Assets include investments and loans, while liabilities consist of borrowings and deposits. An ideal balance between the two can help banks achieve and sustain profitability and financial stability. 

Some of the key objectives of ALM in Banking are:

• Interest rate risk management: This helps reduce the effect of fluctuating rates of interest on an organization’s capital and earnings. 
• Liquidity management: Liquidity management in banking is yet another strategy that banks employ to ensure that they have sufficient funds at any given time to meet their short- and long-term obligations.
• Mitigation of credit risk: This is yet another objective of ALM to effectively manage exposure to loan defaults. It can achieve this by overseeing and expanding credit portfolios. 

Understanding treasury management in banks   

Let us now understand the role of treasury management in banks’ achieving financial stability. It does this by efficiently managing investments, cash flow, and reserves. Some of the key treasury functions include:

• Foreign exchange operations: Facilitates remittances and global trade by offering forex services
• Liquidity management in banking: Ensures that the bank has enough liquid assets and cash to achieve their short-term financial obligations efficiently
• Investment strategies: Help balance risk and reward by diversifying portfolios

Key differences between ALM and treasury 

ALM and Treasury play distinct roles in risk and liquidity management in banking. Listed below are some key distinctions between the two:

Despite the above-mentioned differences between ALM and treasury management in banks, these functions complement each other in banking operations. For instance, while the Treasury is responsible for dealing with investments, liquidity, and forex operations in the short term, the prime focus of ALM is on maintaining and ensuring the stability of the balance sheet in the long term.

Regulatory framework and compliance     

Learning about the RBI regulations on ALM and Treasury is crucial to understanding ALM and risk management in the banking sector. The Reserve Bank of India (RBI) lays out a set of guidelines to ensure that banks manage risks efficiently. Specific ALM bank guidelines include the Structural Liquidity Statement (SLS) and Liquidity Coverage Ratio (LCR). 

In the case of Treasury Management, the regulatory guidelines include forex and derivative regulations, Statutory Liquid Ratio (SLR), and Cash Reserve Ratio (CRR). Likewise, the Bank for International Settlements (BIS) issues Basel III regulations to fortify ALM and risk management in banking.

Technological advancements in ALM and treasury

We learned about some key banking regulations and ALM that adhere to these guidelines to ensure financial stability and sound financial health for banks. In a similar effort to strengthen ALM and risk management, the banking sector is fast adapting to technological innovations. These include Big Data, AI, and automation, all of which work to improve ALM and treasury operations. Thus, the digital transformation of the banking sector is improving financial decision-making activities. 

Conclusion 

Rapid evolutions in technology, banking regulations, and ALM necessitate efficient risk management in banks and financial institutions. Banks are fast treading toward efficiency and profitability with digital transformation and automated processes. In the wake of these developments, updating yourself continually on the various regulatory and market changes becomes extremely important. This is where an online MCom degree from Manipal University Jaipur helps.

Offered on the Online Manipal platform, the degree helps upskill professionals in the banking sector, making them future-ready. Learners can advance their knowledge in areas such as risk management, business, and economic laws, paving their way ahead to diverse career opportunities in the world of banking, finance, accounting, and related industries.