Bank Asset-Liability Management Theory Revisited

Using Kane's (1979) terminology, liability management (LM) is defined as banks' efforts to develop nontraditional borrowing arrangements and to use them profitably, especially to meet loan demand.These nontraditional borrowing arrangements have interest, maturity, and service elements that differ in important ways from traditional deposits or non managed liabilities.The critical distinction is that liability managers are active and not passive participants in bank markets.They package customer services, deposit rates, and maturities on interest-sensitive funds to be competitive.The concept of LM, as defined by Kane, involves two distinct aspects.First, there is the notion of supplementing asset management with only short-term borrowing, referred to as money-desk or reserve-position liability ABSTRACT This paper seeks to build actively managed liabilities into the Kane-Malkiel model of bank portfolio allocation.The approach is to develop explicit channels for bank control of these liabilities in a way that lets managers use them reactively as a counterweight to exogenous disturbances elsewhere in the balance sheet.Our mechanism is to dichotomize managed liabilities into a planned and a reactive component.The reactive component is the counterweight of liability management.It enables bank managers to offset exogenous disturbances to maintain or increase bank utility.The proposed model is rich in its implications for public policy and managerial behavior.While not much has changed over the years, we feel that this new approach does offer a fresh theoretical look at asset-liability management.