Asset-Liability Committee - Definition
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Asset-Liability Committee - ALCO
An asset-liability committee (ALCO) is a committee that handles the asset-liability and risk management affairs of a bank or a financial institution. ALCO functions as a decision-making body, a supervisory group, evaluation committee and risk-management committee for a bank or any other lending institution. An asset-liability committee is otherwise called surplus management committee, this is a unit that handles the financial planning and risk management for the institution, ALCO comprises of senior-management officers or top executives of the financial institution. This committee evaluates the banks assets and liabilities with the aim of separating the underlying risks from potential returns.
A Little More on What is an Asset-Liability Committee - ALCO
An ALCO has the responsibility of evaluating the liquidity risk or market risks associated with different operations of the institution. ALCO plans the balance sheet of the bank, manages the interest rate risks and determining effective borrowing and lending strategy for the bank. The major goal of an ALCO is to guarantee adequate returns and liquidity for the financial institution, in doing so, they influence the net earnings and stock prices of the bank. At the management level of a bank, an ALCO performs oversight functions by creating management information systems (MIS) for effective management of the on- and off-balance sheet risk of the institution.
Liquidity Policy Guidelines
An ALCO manages the interest rate risk and liquidity of a bank, they ensure that the financial institution has enough liquidity while it risks are properly managed. There are certain liquidity policy guidelines that an ALCO should incorporate, the guidelines are;
- The strategies and procedures of the committee should align with the goals and objectives of the bank.
- Operational standards, risk tolerance levels, and liquidity tolerance levels of the bank must be considered.
- The liquidity policies and strategies of the committee should emphasize asset liquidity, asset-liability, operating cash flow and other essentials needed for meeting the needs of the bank.
The asset-liability committee (ALCO) often meet quarterly to establish appropriate policies aimed towards risk management and maintaining an adequate liquidity level for the bank.
Example of Asset-Liability Committee
Different banks across the world have asset-liability committees which often comprise of the banks executives and top management staff. For Alfa-Bank, for example, its ALCO comprises seven or more high-ranking members, with a chairman appointed by the executive board of the bank. The ALCO meetings for this bank are held every two weeks in addition to emergency meetings that are scheduled by the committee. Members of the committee make resolves of risk management and the sustenance of an adequate level of liquidity for the bank.
Reference for Asset-Liability Committee ALCO
https://www.investopedia.com Investing Asset Allocationhttps://www.nasdaq.com/investing/glossary/a/asset-liability-committeewww.investorwords.com/17865/asset_liability_committee_ALCO.htmlwww.yourarticlelibrary.com/...management/asset-and-liabilities-committee-alco/89484https://en.wikipedia.org/wiki/Asset_and_liability_management
Academic research on Asset-Liability Committee ALCO
Asset liability management in banks and financial institutions: a case study of IDBI, Vij, M. (2001). Asset liability management in banks and financial institutions: a case study of IDBI.Journal of Management Research,1(2), 111. ALM as a concept is gradually gaining importance in the Indian conditions. It is the art of ensuring that the maturity profiles of assets match that of liabilities and combines the techniques of asset management, liability management and spread management into a cohesive process leading to an integrated management of the total balance sheet. The process of ALM will differ from bank to bank and the success of the technique depends upon how effectively banks are able to forecast and manage the risks they carry and are exposed to. Efficient liquidity and interest rate management are the two important activities of the banks and financial institutions in maximizing their income while controlling the risk exposure. The objective of ALM at IDBI is to ensure adequate funding for each product at the most attractive available cost and to manage the currency composition, maturity profile and interest rate sensitivity characteristics of the portfolio of liabilities supporting each product within the prescribed risk parameters. A markup theory of bank loan rates, Rousseas, S. (1985). A markup theory of bank loan rates.Journal of Post Keynesian Economics,8(1), 135-144.Asset and Liability Management-The Institutional Approach to ALM by Commercial Banks in Poland: A Special Focus on Risk Management, Zawalinska, K. (1999). Asset and Liability Management-The Institutional Approach to ALM by Commercial Banks in Poland: A Special Focus on Risk Management.CASE Network Studies and Analyses, (185). According to the early evidence, privatization and consolidation of banks have a strong favorable impact on the advancement of ALM and risk management methods. This paper examines various approaches to ALM by commercial banks in Poland. It elaborates results of the empirical survey of ALM and risk management techniques applied by banks in Poland. The survey was conducted in Spring 1999. The analysis shows that privatization of banks contributes to the improvement of efficiency and to better risk management. It creates a favorable climate for implementation of more advanced risk management and measurement techniques. The size of the Polish private banks has also a positive effect on diverse methodology and sophistication of risk management. The analysis implies the need for a further consolidation of Polish financial institutions. Therefore, this paper reinforces arguments in support of accelerated privatization and consolidation of the Polish banking system. Asset Liability Management of a Commercial Bank-A Study on Prime Bank Limited, Faruk, M. O., & Alam, R. (2014). Asset Liability Management of a Commercial Bank-A Study on Prime Bank Limited.International Journal of Information, Business and Management,6(1), 106. Asset Liability Management (ALM) is the core part of the bank with the intention to reduce the risk of the bank and maximizing total revenue. This paper concentrates on the asset (uses of funds) and liabilities (sources of funds) management process of Prime Bank Limited (PBL) and the process of managing different risk of the bank. The main process of ALM is to manage the liquidity risk and the market risks (including Interest Rate Risk). We have evaluated some previous performance through ratio analysis and shown graphically the trend of the position of the bank. There is an ALM committee at PBL who manages the asset and liability strategy of the bank and give the high security against the risk. Then we have found some problems and prospect of the ALM strategy of PBL and provided some suggestions or directions to improve ALM process of the bank. As ALM is the main or core part of the balance sheet of the bank so this paper will help to generate the idea about the ALM process of the banking sector in Bangladesh. The effect of asset liability management on the liquidity risk of Commercial Banks in Kenya, Guthua, A. M. (2013). The effect of asset liability management on the liquidity risk of Commercial Banks in Kenya.Strengthening and improving the liquidity management in Islamic banking, Ismal, R. (2010). Strengthening and improving the liquidity management in Islamic banking.Humanomics,26(1), 18-35.