Bank Asset-Liability Management Theory Revisited

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.