Asset-Liability Committee (ALCO)

An Asset-Liability Committee (ALCO) is a supervisory group—typically at the board or senior management level—responsible for coordinating and overseeing the management of an institution’s assets and liabilities. Its primary goals are to manage liquidity and interest-rate risk, align balance-sheet strategy with the board’s risk appetite, and help ensure adequate returns and overall financial resilience.

Key takeaways

• ALCOs oversee balance-sheet composition to manage liquidity, interest-rate, and operational risks.
• They translate board goals and risk tolerances into strategies, policies, and limits.
• Regular reporting and management information systems (MIS) are essential for evaluating on- and off-balance-sheet risk.
• ALCOs develop contingency funding plans and run scenario analyses to prepare for stressed conditions.

Purpose and objectives

ALCOs bridge strategic oversight and tactical balance-sheet management. Core objectives include:
* Ensuring adequate liquidity to meet daily and contingent funding needs.
Managing the spread between interest income and interest expense.
Assessing interest-rate and other market risks that affect net earnings and capital.
* Establishing policies and procedures that align with board objectives and risk tolerances.

Responsibilities and typical activities

ALCOs perform a range of oversight and governance functions:
* Set and review liquidity and funds-management policies (typically at least annually).
Define market-risk tolerances and limits.
Maintain and review MIS to monitor exposures and performance.
Develop, test, and update a contingency funding plan.
Review immediate funding needs, sources, and potential liquidity shortfalls under adverse scenarios.
Approve strategies for asset-liability composition, diversification, and concentration limits.
Conduct periodic meetings (commonly quarterly, though higher-frequency meetings are used in active or stressed environments).

Risks addressed by ALCOs

Asset-liability management focuses on mitigating key financial risks, including:
* Interest-rate risk — the impact of rate changes on earnings and economic value.
Liquidity risk — the ability to meet cash outflows and funding needs without undue cost or loss.
Operational risk — failures in processes, systems, or controls that affect ALM outcomes.
* Concentration and credit risks associated with asset or borrower concentrations.

Example: ALCO in practice

A bank’s ALCO might be appointed by the executive board, chaired by a senior officer, and composed of voting and non-voting members drawn from treasury, finance, lending, and risk functions. Typical practices include:
* Regular meetings (e.g., every two weeks or quarterly) with authority to approve binding resolutions when a quorum is present.
Monitoring balance-sheet composition to avoid excessive sector concentration (for example, reducing overexposure to a single industry).
Evaluating liquidity of marketable securities to ensure assets can be converted to cash with minimal loss under stress.
* Aligning ALCO actions and reporting with board directives and the institution’s risk appetite.

Best practices

• Align ALCO policies and strategies clearly with board objectives and documented risk tolerances.
• Maintain robust MIS and regular reporting to support timely decision-making.
• Perform regular stress tests and scenario analyses, and update contingency funding plans accordingly.
• Review liquidity and interest-rate policies at least annually and adjust as market conditions evolve.
• Ensure governance clarity: defined membership, roles, quorum requirements, and escalation protocols.

Conclusion

ALCOs play a critical governance role in ensuring a firm’s balance sheet can withstand market volatility, rising interest rates, and other adverse events. By setting policy, monitoring exposures, and preparing contingency plans, ALCOs help protect liquidity, manage profitability, and support long-term financial stability.