ALM and budgeting are separate but closely related financial functions. They are also similar in that both are forward-looking processes.  However, their analytical objectives are quite different. Over a planning period of say one year, for example, the risk of significant changes in the income of a depository institution resulting from changing interest rates is primarily the result of the repricing interaction of its current balance sheet structure. This is the ALM process and the analytical emphasis is on potential NII volatility. Similarly, the valuation of assets and liabilities for the purpose of NEV calculations is based on the existing balance sheet under both current market rates and a hypothetical shock test scenario such as +300BPs.

Budgeting on the other hand, is the process of projecting the overall financial performance resulting from the following: 1) a combination of the current balance sheet, projected changes in that balance sheet over the planning horizon, and the related income effects; 2) the expected level of fee income, operating expenses and the loan loss provision; and 3) the expected levels of the various interest rates in the marketplace and how those rates will affect the asset returns and liability costs. The analytical emphasis is on all performance aspects of both the balance sheet and income statement with special emphasis on Net Income and the variances of the income statement components. An inappropriate balance sheet structure from an ALM standpoint can cause dramatic variances in a budget in the event of unexpected changes in interest rates.