The asset liability management (ALM) process has lost its true function at some banks.

Too often, ALM management is something executives view as a regulatory requirement, to be checked off a to-do list. This is detrimental to a bank’s long-term strategy; ALM should be a primary focus for institutions. The asset liability committee (ALCO) should be using ALM-related data for formulating, testing and executing strategies that drive profits and eliminate competitive threats. Here are four steps to getting the ALCO back on track.

1. List Items Requiring Decisions
The first agenda item and document in the ALCO packet should be a list of actionable items that require decisive action by the end of the meeting. Be sure to review this “action-list” at the beginning of the meeting to ensure a productive outcome.

2. Ensure the Meeting Packet is Relevant, Concise
Meeting packets have become a catchall of information that no one utilizes or reads. Oftentimes, a large percentage of the content is frivolous and provides no insights into an institution or catalyst for collaboration or debate on its strategy. The ALCO packet should contain only the relevant information needed for strategic decision-making, liquidity monitoring, goal progress and policy limits adherence for both assets and liabilities.

Boards must monitor and review the ALCO packet materials for conciseness and relevance. Remove information that is no longer needed and ensure the data included is accurate and serves the need of the committee. For example: If you are reporting on the deposit rates of competitors, should you report only the rates on their websites or in the media? Are those the actual rates being provided to their customers, or is there a better metric to track? Is there a different avenue to obtain this information?

3. The Right People in the Meeting
An ALCO meeting should be a dynamic, collaborative process that builds strategies for both the assets and liabilities of the institution. In effect, it should be the war room for a bank’s offensive and defensive strategies.

Decisions and goals on the asset side impact the funding requirements of the institution; funding needs affect costs, which impacts pricing on potential assets, and so on. That’s why banks must have the leaders of deposits, marketing and lending participating in an active discussion to formulate the best competitive strategy.

Banks should ensure their ALCO meetings have the knowledge necessary to evaluate more complex matters and push the committee to think outside of the box. They should also be sure to have someone who can serve as a “devil’s advocate” to provoke discussion and ideas, a role often best-suited for an independent advisor.

4. Utilize the Asset-Liability Management Model
An asset-liability management (ALM) model is integral to making informed decisions. Committees should rely on the model to run “what-ifs,” testing the hypotheses developed in ALCO on the impacts of growth, derivatives, worst-case scenarios, risk management and funding composition changes.

Banks must ensure, however, that their model is appropriate to the institution, and the information inputs and assumptions used are accurate. Otherwise, it’s junk in, junk out. Banks should also have subject matter experts, either on staff or as independent advisors, who can develop “what-if” scenarios to ensure the committee has accurate and actionable data. And finally, they will need to back-test the model for actual results. This not only helps to refine and improve the results, it will also make the ALCO more comfortable with utilizing the model for decision-making.

Taking these four steps will help your institution’s ALCO meetings become a more action-oriented dynamic strategy meeting – its primary purpose.

Detalus Advisors, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.


Brian Cox