An asset-liability committee (ALCO), also known as surplus management, is a supervisory group that coordinates the management of assets and liabilities with the goal of earning adequate returns. By managing a company’s assets and liabilities, executives can influence net earnings, which may translate into increased stock prices.
Key Insights
- Effective Oversight: Asset-liability committees (ALCOs) are responsible for overseeing the management of a company or bank’s assets and liabilities, ensuring alignment with strategic objectives.
- Risk Management: An ALCO at the board or management level provides critical management information systems (MIS) and oversight for effectively evaluating on- and off-balance-sheet risks.
- Strategic Alignment: ALCO’s strategies, policies, and procedures should align with the board’s goals, objectives, and risk tolerances.
- Ensuring Liquidity: A key goal is ensuring adequate liquidity while managing the spread between interest income and interest expense.
Understanding Asset-Liability Committees (ALCO)
At the board or management level, an ALCO provides essential management information systems (MIS) and oversight to effectively evaluate on- and off-balance-sheet risks. Members integrate interest rate risk and liquidity considerations into the institution’s operating model.
One of the ALCO’s primary goals is to ensure adequate liquidity while managing the spread between interest income and interest expense. Members also consider investments and operational risks.
ALCO meetings should be conducted at least quarterly. Member responsibilities typically include managing market risk tolerances, establishing appropriate MIS, and reviewing and approving the institution’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.
Special Considerations
The strategies, policies, and procedures of an ALCO should align with the board’s goals, objectives, and risk tolerances. Strategies should clearly articulate liquidity risk tolerances and define the centralization or delegation of funds management within the institution.
Strategies should also emphasize the use of asset liquidity, liabilities, and operating cash flows to meet daily and contingent funding needs.
Inspiring Example: Alfa Bank’s ALCO
Alfa Bank’s ALCO is appointed by a resolution of the bank’s executive board. This committee includes seven or more voting members selected for a one-year term. The ALCO is headed by a chair appointed by the executive board. Non-voting ALCO members are appointed by the ALCO chair from among the bank’s specialists and managers for a one-year term.
The ALCO holds its meetings every two weeks, with additional meetings scheduled as needed. The ALCO can resolve matters if more than half the voting members are present. Resolutions pass by a majority vote, and these resolutions are binding on all bank employees.
Alfa Bank’s ALCO exemplifies a well-structured, highly functional committee dedicated to managing the balance between assets and liabilities, thereby ensuring financial stability and success.
Related Terms: Interest Rate Risk, Earnings, Liquidity, Management Information System, Contingency Funding Plan.
