Asset/Liability Management: Beyond Interest Rate Risk

This paper addresses three questions typically neglected by proponents of asset/liability management. First, from a management perspective, which focuses on GAAP and statutory measures of profitability and net worth, is asset/liability management worthwhile? Second, does a company’s balance sheet fully reflect the assets and liabilities that should be managed? Third, what risks should be the focus of asset/liability management? The paper makes three principal arguments: First asset/liability management contributes to a company’s surplus growth, whether measured by GAAP, statutory, or economic criteria. Second, asset/liability management should explicitly take into account a company’s franchise value – the value of expected profit from future business. Third, asset/liability management must deal with more than just interest rate risk, more than just bonds, and more than a given set of liabilities. Its aim should be to assist management in designing their company’s balance sheet, viewed as a portfolio of interdependent risks, so as to maximize the company’s achievable rate of surplus growth.