Asset Liability Committee Overview

Study Notes

The Asset-Liability Committee (ALCO) is responsible for monitoring the liquidity risk of an institution.
The ALCO reports to the Board of Directors or, in the case of a foreign incorporated bank, to senior management of the institution in the country.
The ALCO facilitates, coordinates, communicates, and controls balance sheet planning, addressing risks associated with liquidity and interest rate convergence
The ALCO ensures a bank's operations adhere to its Board of Directors' guidelines but is not responsible for creating the internal liquidity risk management policy.
The ALCO's composition and size are determined by considering the institution's size, operational risks, and organizational complexity.
Institutions must maintain written records of the ALCO's deliberations, decisions, and roles related to liquidity risk management.

A Contingency Funding Plan (CFP) is a set of policies and procedures designed to guide a bank in meeting its funding needs promptly and affordably during stressful scenarios.
The CFP forecasts a bank's future cash flows and sources under different market scenarios, including scenarios of rapid asset growth or liability erosion.
Effective CFPs should:
- Establish clear procedures for timely and uninterrupted information flow to senior management.
- Define clear responsibilities for management during a crisis.
- Include action plans for adjusting asset and liability behavior, such as selling assets to raise cash or increasing deposit interest rates.
- Outline the priority of alternative funding sources, designating primary and secondary sources of liquidity.

Banks and banking groups must implement comprehensive risk management processes to identify, assess, monitor, and control or mitigate all significant risks and ensure adequate capital for their risk profile, as per the Basel Core Principles.
Each institution should develop a comprehensive Risk Management Programme (RMP) tailored to its needs and circumstances, while establishing an independent Risk Management Function to oversee the overall process.
The Risk Management Function should report directly to the board or board committee and ensure effective processes for:
- Identifying existing and emerging risks.
- Developing risk assessment and measurement systems.
- Establishing policies, practices, and control mechanisms to manage risks.
- Determining risk tolerance limits, subject to senior management and board approval.
- Monitoring positions against approved risk tolerance limits.
- Reporting the results of risk monitoring to senior management and the board.

Every RMP should include risk identification and measurement processes.
Risk identification is a continuous process, and risks should be understood both at the transaction and portfolio levels.
Risk measurement involves determining the significance of each identified risk across size, duration, and probability of adverse events.
Accurate and timely risk measurement is critical for effective risk management.

Institutions should have a strategic plan for managing strategic risks, and this plan should be tailored to the institution’s local needs and activities.
Institutions should ensure that their internal resources and processes are aligned with their strategic plan and manage changes effectively.
Alignment of internal resources and processes includes:
- Allocating sufficient financial and non-financial resources to complete necessary tasks.
- Assigning the right people to the appropriate positions.
- Ensuring that organizational structures, risk management structures, systems, infrastructure, and technology can support new initiatives.

Institutions should have mechanisms to monitor the implementation and control of their strategies to ensure success, in addition to strategic planning.
The Board of Directors and senior management should oversee strategic risk management.
Clear written guidelines and procedures should be in place for implementing strategies and monitoring progress.

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