Asset-Liability Committee - Explained
What is an Asset-Liability Committee?
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Table of ContentsWhat is an Asset-Liability Committee?What Does an Asset-Liability Committee Do?Liquidity Policy GuidelinesExample of Asset-Liability Committee
What is an Asset-Liability Committee?
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.
Back to: BANKING, LENDING, & CREDIT INDUSTRY
What Does an Asset-Liability Committee Do?
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.