What does ALM liquidity risk emphasize?

In the context of Asset-Liability Management (ALM), liquidity risk management focuses on the importance of achieving a balance in liquidity levels. This approach ensures that an organization can meet its short-term obligations while also maintaining enough flexibility to accommodate long-term goals and operational needs.

A balanced liquidity level means that while a company must be prepared to handle unforeseen expenses or withdrawals, it also shouldn't hold excessive liquidity that could negatively impact overall returns. It involves assessing the timing of cash flows (both inflows and outflows) and making strategic decisions that align with both current and future liquidity requirements.

This balance helps institutions to not only sustain their operational viability but also optimize their profitability by effectively managing their liquidity position without overcommitting resources to any single area. All these aspects are critical in safeguarding against liquidity crises while ensuring that the organization can continue to meet its commitments to stakeholders.