ALCO's purpose should go beyond compliance

In the current economic and regulatory environment, your financial institution’s Asset-Liability Committee (ALCO) has a lot to think about regarding compliance, ranging from liquidity risk, interest rate risk, investments, funding sources and related issues. However, if your ALCO is concerned only about compliance, your financial institution may be missing out on a huge opportunity.

While the objective of an ALCO is to supervise an institution’s asset and liability position and monitor earnings and net margins, many more benefits can be gained when the role of ALCO evolves from compliance-driven to purpose-driven. It is one thing to evaluate risks within key functions to appease regulators; it is quite another to provide meaningful insights and intelligence that lead to proactive business and risk management decisions.

While there are many ways to extract more value from an ALCO, here are three key ways that financial institutions can start the process:

(1) Redefine Your Objective: While ALCO is a regulatory requirement, that does not mean that its objective has to be centered solely around regulatory compliance. Your ALCO can help break down siloes between functional areas in your organization to more effectively work toward key initiatives. Your ALCO can also support other initiatives, such as model review, and discuss potential business strategies – a new product, pricing changes or marketing promotions. Whatever your additional objectives may be, take the time to clearly define them and communicate them to all ALCO members and stakeholders.

(2) Diversify Your Committee: A diverse and inclusive ALCO will provide access to a range of opinions and perspectives from various aspects of your organization such as lending, retail, funding and investments. Seek out members and advisors who bring new skills and ideas to the table and invite discussion and debate. Ensure the ALCO represents all areas of the balance sheet. By encouraging open dialogue, financial institutions will unlock valuable insights and streamline risk processes and reporting.

(3) Measure Exposures: Most ALCO members will come armed with reports and findings that provide insight into the financial health of your institution. However, uncertainties related to liquidity and capital management means that regulators and management are looking under the hood to see if the institution is considering “what if” scenarios. By going beyond standard report deliverables — measuring exposures to interest rates, validating models and running multiple scenarios on loan portfolios — ALCO arms your organization with projections and forecasts that may alter policy, budgets, funding strategies and more.

A purpose-driven ALCO can be a powerful tool for mitigating risk, understanding your business position and developing an effective business and risk strategy. If your ALCO has been running the same routine for years, the recent interest rate hikes and increased regulatory scrutiny may be reason enough to inject change into your ALCO structure and process.