ASSET-LIABILITY MANAGEMENT 1
Asset-liabilitymanagement refers to the coordination and management practices onassets and liabilities used to achieve adequate returns on assets.Management of assets and liabilities enables companies to improve netearnings and increase share prices (Zenios & Ziemba, 2008). It isused to hedge risks associated with the interaction between assetsand liabilities in organizations. Maximizing assets to meet financialobligations or debts as they arise enables organizations to increasetheir profits. Asset-liability management involves five aspects:liquidity, currency, interest rates, planning for growth and profits,and capital funding projects. General Electric (GE) is one of thefortune 500 companies that use asset-liability management approachesto hedge against various types of risks associated with itsutilization of assets against liabilities. GE is a financialinstitution offering portfolios of financial services in theinternational market, including banking services, forwards, futures,derivatives, and options.
Thepeople responsible for risk management at GE include Board ofDirectors, Committees, and risk managers. Liquidity is an importantaspect of asset-liability management at GE. As a way of achieving theright liquidity that can enable the company to meet its financialobligation, the company manages liquidity resources maintainingliquidity resources which include cash and cash equivalents ofapproximately $90.2 billion, unused credit lines of $44.9 billion,and $1.2 billion worth of liquid investments (General Electric,2014). The risk management process of GE involves the development ofpolicies and standards used to identify and evaluate risk exposures,and analyse individual leases and loans to determine the level ofliquidity in the company. Liquidity risks are managed by the auditcommittee which reviews GE’s financial statements and reportingprocesses to determine the liquidity risk of the company.
Interms of growth and profits, cash and cash equivalents of $12.2billion are reinvested to improve operations and enhance growth ofsubsidiaries in various locations outside United States (GeneralElectric, 2014). Funding of capital is also managed by risk managerswho believe that risk-taking in terms of project funding is importantfor financial services. Risk managers encourage risk-based decisionmaking which include analysis of projects using appropriate methodsto determine the viability of each project in terms of risk andreturns.
GEalso hedges itself against risks associated with changes in interestrates and currencies in the international market (General Electric,2014). The company mitigates exposure to market risks by the GE riskcommittee which is given the responsibility to oversee and managesignificant enterprise risks of the company. Risk Committee meetingsand Board updates can be used to discuss major risks of the companyrelated to changes in currency and interest rates (Zenios &Ziemba, 2008). These meetings will identify risks, develop mitigationstrategies, and implement them.
Themanagement of GE also plays a significant role in mitigating theserisks. The senior managers undertake risk assessment and mitigationprocesses, starting with reviewing long-term strategic andoperational plans of the company in a standard manner (GeneralElectric, 2014). Secondly, the senior managers develop and evaluatestrategies of risk mitigation, and ensure that there is compliancewith the company’s code of conduct among various stakeholders.Senior managers also assess compliance to financial reportingstandards, health and safety standards, and legal requirements. TheCRO and Vice Chairman of GE are responsible for the coordination andoversight of risk assessment and mitigation throughout the enterprise(General Electric, 2014). Generally, the senior management identifiesrisks, provides appropriate strategies to mitigate them, and enforcesthem through policies and procedures. For example, if a currencyfluctuation risk is identified in a specific market, the company mayuse forward contracts to hedge against risks in its financialservices.
GeneralElectric (2014). GE2014 Annual Report.Accessed Sep 2, 2015 from www.ge.com/ar2014/assets/pdf/GE_AR14.pdf.
Zenios,S.A., & Ziemba, W.T. (2008). Handbookof asset and liability management.Amsterdam: North Holland.