What is Liability Management

Liability management is the practice by banks of maintaining a balance between the maturities of their assets and their liabilities in order to maintain liquidity and to facilitate lending while also maintaining healthy balance sheets. In this context, liabilities include depositors’ money as well as funds borrowed from other financial institutions. A bank practicing liability management looks after these funds and also hedges against changes in interest rates.

BREAKING DOWN Liability Management

Banks began to actively manage liabilities in the 1960s by issuing negotiable CDs. These could be sold prior to maturity in the secondary market in order to raise additional capital in the money market. Liability management plays an important in the health of a bank's bottom line. During the run-up to the 2007-08 financial crisis, some banks mismanaged liabilities by relying on short-maturity debt borrowed from other banks to fund long-maturity mortgages, a practice which contributed to the failure of UK lender Northern Rock, according to a government report on the crisis.