ALCO – Blending Form & Function

We have long accepted that the Asset/Liability Committee (ALCO) of a financial institution should be a driver of earnings and hoarder of net interest margin, watching both like a hawk. Unfortunately, a bias still exists that ALCO’s paramount function is to appease regulators and “paper the file.” Whether you are still developing your process by feeling out different reports and metrics or you are running a fine-tuned interest rate risk management machine, here is a recap of basic functions, a touch of history, and several ideas to consider.

 

The ALCO process cannot just be window dressing. Even the best looking reports need to do more than look pretty. There was a recent trend in the automotive industry punctuated by adorning cars with hood scoops, spoilers, and side vents that served no purpose beyond aesthetics. The auto industry has since shed the non-functional eye sores. Similarly, regulators are now looking under the proverbial hood and want to see that all systems and components actually contribute to management’s efforts to manage balance sheet risks. Gone are the days of aiming for the least-costly solution to simply earn a passing grade.

 

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Contributed by: Brandon Janosky
Director, Detalus Consulting