Asset Liability Management (ALM) is an integral part of banking management; and it is essential to have a structured and systematic process for manage the balance sheet of the banks and financial institutions. Banks and financial institutions must have a committee comprising of the senior management of the bank and financial institutions to make important decisions related to the balance sheet of the bank and financial institutions. The committee, typically called the asset liability committee (ALCO), should meet at least once every month to analysis, review and formulate strategy to manage the balance sheet of the banks and financial institutions.
Functions of ALCO
- To receive and review reports on liquidity risk, market risk and capital management as covered in this report.
- To identify balance sheet management issues like balance sheet gaps, interest rate gaps and profiles that are leading to under-performance.
- To review deposit-pricing strategy for the local market.
- Review liquidity contingency plan for the banks and financial institutions.
The asset liability committee is responsible for balance sheet risk management. Managing the asset liability is the most important responsibility of a banks and financial institutions as it runs the risks for not only the banks and financial institutions, but also the thousands of depositors who put money into it. The responsibility of asset liability management is on the treasury department of the bank. Treasury department manages the balance sheet. The results of balance sheet analysis along with recommendation is placed in the ALCO meeting by the treasurer where important decisions are made to minimize risk and maximize returns.