approach while hedging against medium-term uncertainty.   ALM Concept ALM is based on four well-known concepts. The first is liquidity, which in an ALM context does not refer to the ease with which an asset can be bought or sold in the secondary market, but the ease with which assets can be converted into cash.2A banking book is required by the regulatory authorities to hold a specified minimum share of its assets in the form of     1For instance in the U.S. banking sector the terms on deposit accounts were fixed by regulation, and there were restrictions on the geographic base of customers and the interest rates that could be offered. Interest-rate volatility was also low. In this envi- ronment, ALM consisted primarily of asset management, in which the bank would use depositors funds to arrange the asset portfolio that was most appropriate for the liability portfolio. This involved little more than setting aside some of the assets in non-interest reserves at the central bank authority and investing the balance in short- term securities, while any surplus outside of this would be lent out at very short-term maturities. 2The marketability definition of liquidity is also important in ALM. Less liquid fi- nancial instruments must offer a yield premium compared to liquid instruments.     very liquid instruments. Liquidity is very important to any institution that accepts deposits because of the need to meet customer demand for instant access funds. In terms of a banking book, the most liquid assets are over- night funds, while the least liquid are medium-term bonds. Short-term assets such as Treasury bills and CDs are also considered very liquid. The second key concept is the money market term structure of interest rates. The shape of the yield curve at any one time, and expectations as to its shape in the short- and medium-term, impact to a significant extent on the ALM strategy employed by a bank. Market risk in the form of interest- rate sensitivity is significant, in the form of present-value sensitivity of spe- cific instruments to changes in the level of interest rates, as well as the sen- sitivity of floating-rate assets and liabilities to changes in rates. The maturity profile of the book is the third key concept. The maturi- ties of assets and liabilities can be matched or unmatched; although the latter is more common the former is also used routinely depending on the specific strategies that are being employed. Matched assets and liabilities lock in return in the form of the spread between the funding rate and the return on assets. The maturity profile, the absence of a locked-in spread and the yield curve combine to determine the total interest-rate risk of the banking book. The fourth key concept is default risk-the risk exposure that bor- rowers will default on interest or principal payments that are due to the