What Is an Asset-Liability Committee?
An asset-liability committee (ALCO), also known as surplus management, is a supervisory group that coordinates the management of assets and liabilities with a goal of earning adequate returns. By managing a company’s assets and liabilities, executives are able to influence net earnings, which may translate into increased stock prices.
- Asset-liability committees (ALCOs) are responsible for overseeing the management of a company or bank’s assets and liabilities.
- An ALCO at the board or management level provides important management information systems (MIS) and oversight for effectively evaluating on- and off-balance-sheet risk for an institution.
- An ALCO’s strategies, policies, and procedures should relate to the board’s goals, objectives, and risk tolerances for operating standards.
- One of the ALCO’s goals is ensuring adequate liquidity while managing the bank’s spread between the interest income and interest expense.
Understanding Asset-Liability Committees (ALCO)
An ALCO at the board or management level provides important management information systems (MIS) and oversight for effectively evaluating on- and off-balance-sheet risk for an institution. Members incorporate interest rate risk and liquidity consideration into a bank’s operating model.
One of the ALCO’s goals is ensuring adequate liquidity while managing the bank’s spread between the interest income and interest expense. Members also consider investments and operational risk.
ALCO meetings should be conducted at least quarterly. Member responsibilities typically include managing market risk tolerances, establishing appropriate MIS, and reviewing and approving the bank’s liquidity and funds management policy at least annually.
Members also develop and maintain a contingency funding plan, review immediate funding needs and sources, and determine liquidity risk exposures to adverse scenarios with varying probability and severity.
An ALCO’s strategies, policies, and procedures should relate to the board’s goals, objectives, and risk tolerances for operating standards. Strategies should articulate liquidity risk tolerances and address the extent to which central elements of funds management are centralized or delegated in the institution.
Strategies should also communicate how much emphasis is placed on using asset liquidity, liabilities, and operating cash flows for meeting daily and contingent funding needs.
Example of an Asset-Liability Committee
Alfa Bank’s ALCO is appointed by a resolution of the bank’s executive board and includes seven or more members with the right to vote for a one-year period. The ALCO is headed by the ALCO chair appointed by the bank’s executive board. ALCO members without the right to vote are appointed upon presentation to the ALCO chair by order of the bank executive board from among bank specialists and managers for a one-year period.
The bank’s ALCO meetings are typically held every two weeks. Additional meetings may be scheduled as needed. The ALCO has the authority to resolve matters submitted for consideration if more than half of the members with the right to vote are present at the committee meeting. A resolution is passed when more than half the members with the right to vote are present and vote in favor of the resolution. ALCO’s resolutions are binding on all bank employees.
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