Assets and Liabilities Management by Commercial Banks (Theoretical and Practical Aspects)

Abstract

A mismatch between the average maturities of assets and liabilities puts a company's liquidity and interest rate risk at risk. This mismatch has been a major factor to commercial banks' poor financial performance in Pakistan, with the situation being particularly prominent in public sector banks. In July 1992, the State Bank of Pakistan (SBP) issued prudential norms for banking and nonbanking financial organizations to ensure their smooth operation. These regulations, on the other hand, are primarily concerned with the assets side of the balance sheet. According to recent meetings with commercial bankers, SBP is now focusing on liabilities management as well. It examines banks' liabilities management functions and makes recommendations for improvement. As a result, it's possible that the SBP would release precise recommendations and set limits/ benchmarks for commercial banks to follow in terms of liabilities management in the near future. This topic evaluates the Assets/Liabilities Management (ALM) function of commercial banks in Pakistan, in order to assess the importance being given to this function, the extent of awareness of ALM issues amongst bank executives/officers and ALM tools and techniques presently being employed