The Principles of Banking

Chapter 9

Asset–Liability Management IV: The ALCO

The fourth strand of our look at traditional ALM considers the reporting process, often overseen by the bank's ALM committee (ALCO). The ALCO will have a specific remit to oversee all aspects of ALM, from the front-office money market function to back-office operations and middle office reporting and risk management. In this chapter we introduce the basic elements of ALCO procedures, before taking a more detailed look at ALCO objectives and terms of reference in Chapter 10.

ALCO Policy

The ALCO 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. The ALCO also sets hedging policy.¹

The ALM process is undertaken by the Treasury desk. In commercial banks it will be responsible for management reporting to the ALCO. The ALCO will consider the report in detail at regular meetings, usually weekly. Main points of interest in the ALCO report include variations in interest income, the areas that experienced fluctuations in income and the latest short-term income projections. The ALM report will link these three strands across the group entity and also to each individual business line. That is, it will consider macro-level factors driving variations in interest income as well as specific desk-level factors. The former includes changes in the shape and level of the yield curve, while the ...