Chapter 8ASSET AND LIABILITY MANAGEMENT II: THE ALCO

We continue the discussion on bank asset‐liability management (ALM) with a review of the asset–liability management committee (ALCO). ALCO has a specific remit to oversee all aspects of asset–liability management, from the front‐office money market function, to back‐office operations, and middle‐office reporting and risk management. In the author's opinion it is the most important risk management committee in a bank because it is concerned wholly and solely with the balance sheet, more critically the long‐term viability of the balance sheet. For this reason, an effective ALCO governance process is vital for every bank, irrespective of size or business model.

In this chapter we consider the traditional role of ALCO and then go on to present recommended best‐practice principles, which may be applied in any bank.

TRADITIONAL ALCO MISSION

The ALM reporting process is overseen by the bank's ALCO. It is responsible for setting and implementing ALM policy. Its composition varies in different banks but usually includes heads of business lines as well as director‐level staff such as the finance director. It also oversees direction on issues such as strategy and risk hedging policy.

Table 8.1 is a summary overview of the traditional responsibilities of ALCO.

Table 8.1 ALCO traditional mission

Mission Components
ALCO management and reporting Formulating ALM strategy
  Management reporting
  ALCO agenda and minutes

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