What is meant by the term 'asset-liability management'?

The term 'asset-liability management' refers to the practice of balancing a bank's assets and liabilities to optimize financial performance and mitigate risks. This involves analyzing the relationship between assets, which generate income, and liabilities, which incur costs. Effective asset-liability management ensures that a financial institution maintains adequate liquidity, manages interest rate risk, and protects against market fluctuations.

By carefully managing the composition and duration of both assets and liabilities, banks can improve their stability and profitability. This practice is critical in maintaining financial health and meeting regulatory requirements. The focus is on aligning risk exposure in both sides of the balance sheet to ensure that the bank can meet its obligations as they arise and withstand economic pressures.

In contrast, the choices involving managing assets for creating new branches, investing specifically in stocks and bonds, or monitoring customer accounts do not encapsulate the comprehensive risk management and strategic financial planning involved in asset-liability management. Those activities represent more specialized aspects of banking operations rather than the systemic risk mitigation focus inherent in asset-liability management.