the Bank Asset-Liability Committee (ALCO): ensuring effective governance and risk management
by Moorad Choudhry The onset of the COVID-19 stress on markets and the subsequent “lockdown” policy response from governments worldwide has created a genuine stress event potentially on a par with that observed in the financial crash of 2008, if not worse. The impact on global markets has been significant, and this time banks need to demonstrate both adaptability and speed of response as they manage events and support their customer franchise through the impending recession. How best should banks address the need to ensure flexibility and rapid decision-making, while maintaining balance sheet robustness during this time? What should the role of ALCO be? And critically, how can ALCO assist the bank to meet its key objectives? A committee is, after all, just another committee. Making a committee effective and “real” to the business is a challenge that goes beyond the mere procedural and into the realm of the cultural. And as befits a forum that is viewed typically as a “technical” one, the challenge is not a trivial one: how do we make the ALCO meaningful to the business lines, so they derive the full value-added that the primary balance sheet management forum should be delivering? And what “lessons learned” might ALCO benefit from once the current lockdown restrictions have been eased?
ALCO and its importance The ALCO has always been an important management committee in any bank. In previous publications the author had noted:
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A greater number of financial institutions are enhancing their risk management function by adding to the responsibilities of…the Asset and Liability Committee (ALCO)…and integrating…traditional interest-rate risk management with credit risk and operational risk. “In order to fulfill this more enhanced function, ALCO will require a more strategic approach to [its] function. (From The Bond and Money Markets: Strategy, Trading, Analysis, Butterworth-Heinemann 2001, page 536)
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Intelligent Risk - April 2020
