Liquidity & Balance Sheet
Asset-Liability Committee
Also known as ALCO, Asset Liability Committee, Asset/Liability Management Committee, Asset-Liability Management, ALM
An asset-liability committee (ALCO) is the group of senior bank managers that manages interest rate risk, liquidity and funding within limits the board of directors sets. That work is called asset-liability management (ALM): deciding how the balance sheet is positioned for changes in interest rates and deposit flows.
How an ALCO measures interest rate risk
ALCO has no single ratio of its own. Its two core measures are earnings sensitivity, the change in projected net interest income over the next 12 months when rates move by a set amount, and economic value of equity (EVE) sensitivity, the change in the present value of assets minus liabilities under the same shock. Each is compared with a limit the board approves, typically for parallel rate moves of 100 to 400 basis points in both directions.
Why does an ALCO matter?
Interest rate risk is the "S" (sensitivity to market risk) in the CAMELS rating, and examiners judge it largely through the ALCO's limits, models and minutes. The 2023 bank failures showed the cost of getting it wrong: long-dated, fixed-rate securities funded by deposits that repriced or left quickly. An ALCO that measures the exposure and acts on it is the control that prevents that pattern.
Besides the net interest income forecast, the committee reviews economic value of equity (EVE) sensitivity: how much a rate shock would change the present value of the balance sheet.
How do you interpret an ALCO?
Read an ALCO by its results and its limits rather than its existence. Useful questions: does net interest income rise or fall when rates move, how close is the bank to each board limit, how much of the deposit base would reprice or leave in a rate shock, and how large are unrealized losses on securities against capital. Public call report data answers several of these from the outside, including the maturity profile of loans and securities and unrealized securities losses.
How examiners judge an ALCO
| Range | Label | Interpretation |
|---|---|---|
| Within all board limits | Controlled | NII and EVE sensitivity inside every approved limit. |
| Near a limit | Watch | Exposure close to a limit, with a plan to manage it. |
| Limit breach, remediation underway | Elevated | Breach reported to the board with corrective action. |
| Persistent breaches | Concern | Limits exceeded without timely correction; a likely examination finding. |
Worked example
Frequently asked
What does ALCO stand for in banking?
Asset-liability committee. Some banks call it the asset/liability management committee; the role is the same: managing interest rate risk, liquidity and funding within board limits.
What is asset-liability management in banking?
Asset-liability management (ALM) is the practice of matching a bank's assets and liabilities so that changes in interest rates and deposit flows do not threaten earnings, capital or liquidity. The ALCO is the committee that carries it out.
Who sits on a bank's ALCO?
Typically the chief executive, chief financial officer, treasurer, chief lending and deposit officers and the head of risk. Smaller banks often include board members. The board approves the limits; the ALCO manages within them and reports back.
How often does an ALCO meet?
Most meet monthly or quarterly, and more often when rates or deposit flows move sharply. Examiners review the minutes to see whether the committee measures exposure against its limits and acts on what it finds.
Sources
- Interagency Advisory on Interest Rate Risk Management (FFIEC agencies, January 2010)
- Joint Agency Policy Statement on Interest Rate Risk (1996)
- OCC Comptroller's Handbook: Interest Rate Risk
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