Ministry of education tashkent financial institute

1.3 Liability Management

Liability management is the practice by banks of maintaining a balance between the maturities of their assets and their liabilities in order to maintain liquidity and to facilitate lending while also maintaining healthy balance sheets. In this context, liabilities include depositors’ money as well as funds borrowed from other financial institutions. A bank practicing liability management looks after these funds and also hedges against changes in interest rates. A bank can face a mismatch between assets and liabilities because of illiquidity or changes in interest rates; and liability management reduces the likelihood of a mismatch. A bank must pay interest on deposits and also charge a rate of interest on loans. To manage these two variables, bankers track the net interest margin or the difference between the interest paid on deposits and interest earned on loans.

Banks began to actively manage assets vs. liabilities in the 1960s by issuing negotiable CDs. These could be sold prior to maturity in the secondary market in order to raise additional capital in the money market. Also known as asset/liability management, this strategy plays an important in the health of a bank's bottom line. During the run-up to the 2007–08 financial crisis, some banks mismanaged liabilities by relying on short-maturity debt borrowed from other banks to fund long-maturity mortgages, a practice that contributed to the failure of U.K. mortgage lender Northern Rock, according to a government report on the crisis.

An asset-liability committee (ALCO), also known as a bank's surplus management team, is a supervisory group that coordinates the management of assets and liabilities with a goal of earning adequate returns. By managing a company's liabilities effectively, the ALCO provides oversight for better evaluating on- and off-balance-sheet risk for an institution. Members incorporate interest rate risk and liquidity consideration into a bank’s operating model.