The Principles of Banking, 2nd Edition

CHAPTER 9ALCO Governance Framework and Terms of Reference

Abstract

The asset-liability committee (ALCO) in a bank is the governance forum responsible for managing the bank's balance sheet. As a robust and long-term viable balance sheet is essential for the survival of the bank in perpetuity, the ALCO itself must be organised such that it has the requisite expertise and authority necessary to fulfil its mission. We review the role of ALCO and provide a good-practice template for the ALCO governance framework and terms of reference. This is suitable for most commercial banks, irrespective of their jurisdiction.

The question as to what is the most important management body in a bank might be considered to be an uncontentious one. Most people would answer, “The board of directors; after all, the board has the ultimate responsibility for the continued viability and good governance of the bank.” Others might reply, “The CEO-chaired executive committee or ‘Exco’; it has delegated authority from the Board to run the bank on a day-to-day basis, in line with the Board's overall long-term objectives.” Either answer has merit.

The author's reply to this question is unequivocal: the most important forum in a bank, in any bank, is its asset–liability committee (ALCO). Events throughout banking history have shown that the balance sheet is everything: get the balance sheet wrong in any way and the result is always serious, often catastrophic. Most bank failures, again throughout history, ...