a large num- ber of financial institutions that adopt the traditional approach, indeed the nature of their operations would not lend themselves to anything more. We can summarize the role of the traditional ALM desk as follows:   ■ Interest-rate risk management. This is the interest-rate risk arising from the operation of the banking book. It includes net interest income sen- sitivity analysis, typified by maturity gap and duration gap analysis, and the sensitivity of the book to parallel changes in the yield curve.     The ALM desk will monitor the exposure and position the book in accordance with the limits as well as its market view. Smaller banks, or subsidiaries of banks that are based overseas, often run no interest-rate risk, that is there is no short gap in their book. Otherwise the ALM desk is responsible for hedging the interest-rate risk or positioning the book in accordance with its view. ■ Liquidity and funding management. There are regulatory requirements that dictate the proportion of banking assets that must be held as short-term instruments. The liquidity book in a bank is responsible for running the portfolio of short-term instruments. The exact make-up of the book is however the responsibility of the ALM desk, and will be a function of the desks view of market interest rates, as well as its opin- ion on the relative value of one asset over another. For example, it may decide to move some assets into short-dated government bonds, above what it normally holds, at the expense of other money market instru- ments, or vice-versa. ■ Reporting on hedging of risks. The ALM desk provides senior man- agement with information by regularly reporting on the banks risk exposure. ■ Setting up risk limits. The ALM unit will set limits, implement them and enforce them, although it is common for an independent "middle office" risk function to monitor compliance with limits. ■ Capital requirement reporting. This function involves the compilation of reports on capital usage and position limits as a percentage of capi- tal allowed, and reporting to regulatory authorities.   All financial institutions will carry out the activities described above.   Developments in ALM A greater number of financial institutions are enhancing their risk man- agement function by adding to the responsibilities of the ALM function. These have included enhancing the role of the head of Treasury and the asset and liability committee (ALCO), using other risk exposure measures such as option-adjusted spread and value-at-risk (VaR), and integrating