Before any ALM model can be understood, the balance sheet it models must be understood. This module is a structured tour of what a large US bank balance sheet actually looks like — not as an accounting document but as a collection of rate-sensitive cash flow streams with different maturities, different repricing frequencies, and different behavioral characteristics.
Assets: loans in their various forms, investment securities, cash and reserves. Liabilities: deposits of every type, wholesale funding, long-term debt. Each category has a distinct repricing profile — and the mismatch between asset repricing and liability repricing is the fundamental source of interest rate risk that ALM exists to manage.
By the end of this module, when someone in an ALCO meeting says the book is asset-sensitive or we are running long duration, you will know exactly what that means, why it matters, and what it implies for NIM under different rate scenarios.
The standard accounting balance sheet shows familiar categories: loans, securities, deposits, long-term debt. For ALM practitioners, a far more useful framing is to view the balance sheet as a collection of future cash flow streams — each asset generating interest and principal inflows at different points in time and at different rates, each liability requiring interest and principal outflows according to its own schedule. The ALM team's job begins by shifting perspective from these balance sheet categories to understanding the precise timing and rate sensitivity of underlying cash flows. This distinction separates accounting from active balance sheet management.
The asset side is where the bank earns. Each asset type has a distinct repricing behavior, and that behavior shapes the bank's exposure to interest rate changes.
C&I loans are typically the fastest-repricing assets on a bank balance sheet. Most are floating-rate, priced at SOFR or Prime plus a bank spread, with quarterly or monthly resets. When the Federal Reserve raises rates, C&I loan yields move within weeks — not years. This speed of repricing is a material advantage for banks with substantial C&I franchises.
JPMorgan's commercial banking segment benefited enormously from the 2022–2023 hiking cycle. As floating rates reset upward from 1% to 7–9%, the impact on net interest income was profound: NII grew from $44 billion in 2021 to $65 billion in 2023, a 48% increase driven significantly by the speed at which C&I yields repriced. This rapid repricing creates natural hedging for banks with strong C&I lending operations.
CRE lending is more complex than C&I. Most CRE underwriting produces a mix of floating and fixed-rate loans, often with 3–7 year terms and balloon payments at maturity. The fixed-rate portion creates duration risk. Consider a concrete example: a 5-year fixed-rate CRE loan originated at 4% in 2021 will continue earning 4% for its fixed period. By 2023, comparable new CRE originations were pricing at 7–8%. That legacy 4% loan creates a multi-year earnings headwind, continuing to pay 4% while the bank's new funding costs far exceed that rate.
Wells Fargo understood this repricing dynamic well and began disclosing detailed CRE repricing schedules in quarterly earnings presentations to help investors understand how quickly the portfolio would reset to market rates. This transparency reflected the importance of managing CRE duration in a rising-rate environment.
Residential mortgages represent the longest duration, most complex asset on most bank balance sheets. A 30-year fixed-rate mortgage originated at 3% in 2021 will continue paying 3% for 30 years unless the borrower refinances or sells the property. The bank cannot force repricing. This creates persistent NIM drag when rates rise — the mortgage yield is locked in while the cost to fund it rises.
Prepayment risk adds another layer of complexity. When rates fall, borrowers rationally refinance, forcing the bank to reinvest proceeds at lower rates at precisely the moment the bank would prefer not to. This asymmetry — the bank benefits when rates rise but suffers when they fall — is fundamental to mortgage portfolio management. Mortgage-heavy banks often underperformed in 2022–2024 when liability repricing compressed spreads while mortgage yields remained locked in.
Consumer loans and credit cards are mostly floating-rate with relatively short durations. Credit card balances reprice frequently, often monthly or quarterly, making them among the fastest-repricing consumer assets. Auto loans, by contrast, are typically fixed-rate with 4–6 year terms — a medium-duration fixed asset that creates meaningful duration exposure for consumer lenders. Capital One, following its 2025 acquisition of Discover Financial, now carries one of the banking system's largest card receivable books, a portfolio that reprices far faster than the average bank's overall asset base.
Investment securities typically represent 15–30% of total assets at a large bank. This is where the ALM team's active management lever resides. The key distinction is between available-for-sale (AFS) securities, marked to market quarterly with unrealized gains and losses flowing through accumulated other comprehensive income directly into book equity, and held-to-maturity (HTM) securities, carried at amortized cost on the balance sheet without mark-to-market revaluation.
The ALM team uses the securities portfolio as an active tool to adjust the overall rate sensitivity of the balance sheet. When the bank is asset-sensitive and seeks to reduce risk, the team may extend duration by purchasing longer-dated securities or reduce the portfolio. When liability-sensitive, the team may shorten duration or increase the securities book. This portfolio management discretion is one of the most powerful tools in the ALM toolkit.
Cash and reserve balances held at the Federal Reserve are the ultimate short-duration asset. Banks hold excess reserves earning the Interest on Reserve Balances rate set by the Federal Reserve. In 2021, excess reserves in the US banking system exceeded $2.5 trillion — an unprecedented amount of system-wide liquidity. When IORB was set at 5.40% in 2023, interest income from reserve balances was a material NII contributor. JPMorgan, which held hundreds of billions of reserves, benefited significantly from this rate floor during the hiking cycle.
The liability side is where the bank pays. The cost and duration of liabilities drive the bank's funding structure and its interest rate sensitivity.
Noninterest-bearing demand deposits — checking accounts paying zero interest — are the most valuable funding source any retail bank can hold. They provide costless capital with no interest outflow. Their value increases materially as interest rates rise because the bank deploys this free funding into assets earning market rates.
However, these deposits are sticky only if the customer perceives relationship value. When depositors become rate-sensitive, migration occurs rapidly. Bank of America experienced this dynamic directly: the percentage of noninterest-bearing deposits fell from approximately 35% of total deposits in early 2022 to roughly 25% by 2024 as depositors moved balances to higher-yielding accounts. That shift represented a significant NIM headwind.
Interest-bearing savings and money market accounts can be repriced at any time, but repricing betas differ dramatically by channel. At a traditional branch bank with strong customer relationships and switching costs, deposit betas are lower — a 100 basis point Fed rate increase might result in a 40–50 basis point deposit rate increase. At a digital-only bank with no branches and rate-seeking customers, betas approach 1.0 immediately — the bank must pass through nearly every basis point of Fed hikes to stay competitive or face rapid deposit decay.
Certificates of deposit are fixed-rate time deposits with terms typically ranging from 3 months to 5 years. They do not reprice until maturity, creating a predictable and measurable repricing schedule — this is actually valuable for ALM planning. The bank can forecast precisely when CD rates will reprice.
In 2022 and 2023, banks promoted CD specials to attract deposits, offering rates as high as 4.5–5.5% for terms maturing through 2024 and 2025. Those CDs are now rolling off at dramatically lower costs. This maturity schedule explains why overall deposit costs are declining even as the Federal Reserve has only moved modestly on rate cuts — the high-rate CDs are maturing and being replaced with lower-cost funding.
Federal Home Loan Bank advances are collateralized loans available in various maturities, typically priced off SOFR or at fixed rates. They are a critical liquidity tool, though it bears emphasis: they are a liquidity bridge, not a solvency solution. During the March 2023 banking stress, First Republic Bank borrowed over $100 billion from the FHLB system — the largest emergency FHLB drawdown in history — to fund deposit outflows. First Republic failed anyway three months later, a stark reminder that FHLB access cannot solve fundamental solvency or credit problems.
Senior unsecured bonds and Total Loss-Absorbing Capacity (TLAC) instruments form the longer-dated liability stack. Senior unsecured debt typically has maturities of 3–10 years at issuance. Global systemically important banks maintain TLAC-eligible debt that can be written down in a resolution scenario. Managing the composition, maturity schedule, and funding cost of TLAC-eligible instruments is a distinct ALM responsibility that has grown in importance since the 2008 financial crisis and subsequent Dodd-Frank reforms.
The fundamental source of interest rate risk is the difference between how quickly assets reprice and how quickly liabilities reprice when rates change. Understanding this mismatch is understanding the core of what ALM practitioners manage.
Consider a simplified but realistic scenario: a bank originates a portfolio of 30-year fixed-rate mortgages at 4% and funds them with online savings accounts repriced daily at competitive market rates. Interest rates rise 200 basis points. The mortgage yields remain at 4% — the rate is fixed for 30 years and borrowers cannot be forced to refinance. But the bank's savings account rate must rise approximately 150–200 basis points within 90 days to remain competitive with money market funds and other alternatives, or depositors will exit. The funding spread compresses by 150 basis points. NIM falls materially. The bank faces this compression for years until mortgages mature or prepay.
Reverse the scenario: rates fall 200 basis points. Savings rates decline 150 basis points because the bank faces less competitive pressure. Mortgage yields again stay flat. The spread widens. NIM expands. The bank benefits from this asymmetry.
This fundamental asymmetry — fixed-rate assets coupled with variable-rate liabilities — is the definition of liability sensitivity. Managing this mismatch, deciding how much interest rate risk the bank should accept, using hedges and active portfolio composition to adjust the risk profile — this is precisely what the ALM function does.