Asset/Liability Management of Financial Institutions: Maximizing Shareholder Value through Risk-Conscious Investing Chapter 1 The task of asset/liability management

True financial innovation is brought about by necessity, be it through competition or cata-clysms. In particular, large-scale financial losses have a unique capacity for improving invest-ment theory and practices, thus benefiting the financial system as a whole. In Chinese, ‘crisis’ is spelled using two characters, one representing ‘risk ’ and another ‘opportunity’. This book is yet another testament as to how inextricable these notions are. However, the context with-in which the relationship between them is explored extends beyond the usual discussion on risk/return trade-offs with which investment theory, portfolio management and risk manage-ment are concerned. While a large part of this book is devoted to the identification and man-agement of asset/liability mismatches as well as the realism of assumptions regarding future expected returns, it is argued that the biggest opportunity today lies in better utilizing the tremendous flexibility afforded by financial markets and a wide variety of ALM tools. When explaining the timeliness of this book, the following parallel between the current state of ALM and the evolution of risk management as a rigorous discipline seems insightful. In the early to mid-1990s, the need for more sophisticated risk management became apparent following landmark financial crises where, typically, unsophisticated financial institutions suf