AssetLiability

Asset-liability refers to the relationship between a company’s assets and its liabilities, particularly how they interact in financing and risk management. In accounting, assets are resources with expected future benefits, while liabilities are obligations to transfer resources or provide services in the future. The balance sheet expresses the fundamental equation: assets equal liabilities plus equity. The term is commonly extended to asset-liability management (ALM), the coordinated process of making asset and funding decisions to achieve financial goals while controlling risk.

For non-financial firms, asset-liability considerations focus on liquidity planning, working capital management, and solvency. For financial institutions, ALM is a formal discipline devoted to controlling risks that arise from mismatches in the timing and variability of asset cash flows and liability maturities, such as interest rate risk, liquidity risk, and funding risk. The central aim is to ensure the ability to meet obligations under varied conditions without incurring unacceptable losses, while maintaining profitability within a defined risk tolerance.

Common ALM tools include gap analysis, which tracks asset and liability maturities by time buckets; duration and convexity analysis to assess sensitivity to interest rate changes; and scenario and stress testing to evaluate outcomes under adverse conditions. Liquidity metrics like the liquidity coverage ratio and net stable funding ratio are used in regulated institutions to gauge resilience. Hedging, extending maturities, securitization, and diversifying funding sources are typical strategies.

Regulatory frameworks, such as Basel III, influence ALM practices by imposing liquidity and capital standards that affect how institutions structure assets and liabilities. Limitations of ALM models include reliance on assumptions, model risk, and potential mispricing under extreme or unseen scenarios. See also balance sheet, liquidity risk, solvency.