Banking Term of the day

Asset/Liability Committee (ALCO)

A risk management committee in a bank that evaluates the risk associated with the bank’s assets and liabilities. It manages interest rate risk while ensuring adequate returns and liquidity.

Functions of ALCO

  1. To ensure the efficient implementation of balance sheet management policies as directed by GALCO (Group ALCO) and RALCO (Regional ALCO).
  2. To receive and review reports on liquidity, market risk and capital management.
  3. To identify balance sheet management issues that are leading to under-performance and refer those that cannot be resolved locally to Regional ALCO.
  4. To review deposit-pricing strategy for the local market.
  5. Ensures sustainable funding for the balance sheet.
  6. Giving directions to the ALM team on the interest rate risk.

ALCO delegates the daily management of liquidity risk and interest rate risk to ALM.

In carrying out its duties, ALCO should pay particular attention to the following points:

Liquidity

  1. Ensure compliance with banks Group policy and regulatory requirements.
  2. Set local targets and review assumptions used for forecasting cashflows.
  3. Review and approve contingency plans for liquidity and realisability assumptions.
  4. Review and manage concentration risk arising from both borrowers and depositors.
  5. Ensure business activity is consistent with the structural integrity of the balance sheet, including capital consumption.
  6. Ensure that risks inherent in local payment systems are evaluated, quantified and managed.

Market Risk

  1. Review requirements set by external regulators both locally and on a Group basis (bank).
  2. Establish a rate setting mechanism for all published rates on assets and liabilities with the objective of ensuring that rate risk is effectively transferred to banks treasury units wherever possible.
  3. Review Price risk profiles of the balance sheet, especially exposures relating to nil rate or administered rate products that give rise to basis risk.
  4. Review hedging of remittable profits.

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