What is Asset-Liability Management? Lessons from General Electric (GE)

As a startup or SME, you will soon realize that you need to manage your assets and liabilities effectively to achieve cost minimization and increased profits.

What is Asset-Liability Management?

Asset-liability management refers to the coordination and management practices on assets and liabilities used to achieve adequate returns on assets. Management of assets and liabilities enables companies to improve net earnings and increase share prices (Zenios & Ziemba, 2008). It is used to hedge risks associated with the interaction between assets and liabilities in organizations.

Maximizing assets to meet financial obligations or debts as they arise enables organizations to increase their profits. Asset-liability management involves five aspects: liquidity, currency, interest rates, planning for growth and profits, and capital funding projects.

General Electric Case Study

General Electric (GE) is one of the fortune 500 companies that use asset-liability management approaches to hedge against various types of risks associated with its utilization of assets against liabilities. GE is a financial institution offering portfolios of financial services in the international market, including banking services, forwards, futures, derivatives, and options.

The people responsible for risk management at GE include Board of Directors, Committees, and risk managers. Liquidity is an important aspect of asset-liability management at GE. As a way of achieving the right liquidity that can enable the company to meet its financial obligation, the company manages liquidity resources maintaining liquidity resources which include cash and cash equivalents of approximately $90.2 billion, unused credit lines of $44.9 billion, and $1.2 billion worth of liquid investments (General Electric, 2014).

Risk Management Process of GE

The risk management process of GE involves the development of policies and standards used to identify and evaluate risk exposures, and analyse individual leases and loans to determine the level of liquidity in the company.  Liquidity risks are managed by the audit committee which reviews GE’s financial statements and reporting processes to determine the liquidity risk of the company.

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In terms of growth and profits, cash and cash equivalents of $12.2 billion are reinvested to improve operations and enhance growth of subsidiaries in various locations outside United States (General Electric, 2014). Funding of capital is also managed by risk managers who believe that risk-taking in terms of project funding is important for financial services. Risk managers encourage risk-based decision making which include analysis of projects using appropriate methods to determine the viability of each project in terms of risk and returns.

GE’s Risk Committee

GE also hedges itself against risks associated with changes in interest rates and currencies in the international market (General Electric, 2014). The company mitigates exposure to market risks by the GE risk committee which is given the responsibility to oversee and manage significant enterprise risks of the company. Risk Committee meetings and Board updates can be used to discuss major risks of the company related to changes in currency and interest rates (Zenios & Ziemba, 2008). These meetings will identify risks, develop mitigation strategies, and implement them.

Role of Management in mitigating Risks

The management of GE also plays a significant role in mitigating these risks. The senior managers undertake risk assessment and mitigation processes, starting with reviewing long-term strategic and operational plans of the company in a standard manner (General Electric, 2014).

Secondly, the senior managers develop and evaluate strategies of risk mitigation, and ensure that there is compliance with the company’s code of conduct among various stakeholders. Senior managers also assess compliance to financial reporting standards, health and safety standards, and legal requirements. The CRO and Vice Chairman of GE are responsible for the coordination and oversight of risk assessment and mitigation throughout the enterprise (General Electric, 2014).

Generally, the senior management identifies risks, provides appropriate strategies to mitigate them, and enforces them through policies and procedures. For example, if a currency fluctuation risk is identified in a specific market, the company may use forward contracts to hedge against risks in its financial services.

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