Interest-rate risk falls under which category in ALM?

Interest-rate risk is classified under market risks in Asset Liability Management (ALM). This classification is based on the fact that interest-rate risk arises from fluctuations in interest rates that can affect the value of financial instruments, the cost of borrowing, and the income generated from assets.

In ALM, market risks are concerned with the potential for financial losses due to changes in market conditions, which include interest rates, foreign exchange rates, and other market variables. When interest rates rise or fall, they can impact the net interest margin and overall profitability of an institution. Therefore, managing interest-rate risk is crucial for maintaining financial stability and ensuring that the institution meets its obligations.

Understanding this classification helps financial managers and auditors identify the potential exposure to interest-rate changes and implement appropriate strategies for mitigating risks, such as hedging or adjusting the duration of assets and liabilities. In contrast, credit, capital, and operational risks pertain to different aspects of financial management and do not specifically address the issues associated with changes in interest rates.