Alex Fopiano of Massachusetts is a treasury analyst who oversees various portfolios and investments. As an ALCO member, Alex Fopiano explains in the following article what it means to be a member of an Asset-Liability Committee.
An asset-liability committee, otherwise known as an ALCO or surplus management, is a group of supervisors that coordinates assets and liabilities with the primary goal of earning sufficient returns.
Through proper asset and liability management, executives on the board of a company or bank can influence net earnings, which could increase the entity’s stock market prices explains Alex Fopiano of Massachusetts.
A Deeper Look at Asset-Liability Committees (ALCO)
An ALCO at the management or board level offers crucial management information systems (often shortened to MIS) and oversight to properly evaluate the on-balance-sheet and off-balance-sheet risks for the affiliated institution. Members of the asset-liability committee put interest rate risk into the bank’s operational model while considering liquidity.
Typically, Alex Fopiano of Massachusetts says that the committee aims to ensure sufficient liquidity while overseeing the spread of interest income and interest expenses. Operational and investment risks are also considered by the group.
The general rule of thumb is that ALCO meetings should happen quarterly. However, many choose to meet once a month to ensure adequate attention to detail and risk management.
The Roles and Responsibilities
Alex Fopiano states that member responsibilities usually including establish proper management information systems, reviewing the institution’s liquidity, offering funds management policies, and managing risk tolerances.
On top of that, contingency funding planning, reviewing immediate funding needs, and determining risk exposures are all part of their duties.
Specifically, Alex Fopiano of Massachusetts explains that ALCO members will deal with the following roles and responsibilities:
- Approving policies and directions with all factors of balance sheet management
- Authorizing new products and processes
- Providing strategic advice with respect to balance sheet shape and structure
- Providing strategic direction to the management of the company’s liquid asset buffer
- Ensuring the company is compliant with all regulations regarding liquidity, capital, and funding
- Meeting once a month unless there are extenuating circumstances
- Overseeing the risks related to liquidity, interest rates, FX risks, capital, and funding by managing risks exposures and liquid asset buffers
- Providing treasury support by designing specific policies, guaranteeing compliance, and producing the analysis from monthly ALCO meetings
- Offering treasury services by practicing supporting new product development and pricing decisions
ALCO’s Traffic Light Risk Categorization Method
Most ALCOs use the traffic light system when identifying and categorizing risks.
Alex Fopiano of Massachusetts says that the method works as follows:
- Green indicates everything is in order, with no breached limits. In other words, there’s nothing to dwell on.
- Amber provides an advance warning of a problem that may arise.
- Red indicates an urgent issue requiring the committee’s immediate resolution.
Every Strategy is Different
Alex Fopiano of Massachusetts says that while the general roles and responsibilities stay consistent, each asset-liability committee must generate its own strategies, policies, and procedures according to the bank’s board’s goals, risk tolerances, and objectives. After all, every institution is different.
The strategies generated by an ALCO should pertain to liquidity risk tolerances and consider the centralization or delegation of the funds’ management within the bank.
In addition, the protocols provided should outline the emphasis that’s placed on using asset liquidity, operating cash flows, and liabilities for meeting day-to-day and emergency financial needs.
Who Joins ALCO
According to Alex Fopiano, an asset-liability committee is made up of senior-management officers and/or top executives of a specific financial entity. That way, members have access to all the information they need to make effective decisions and efficiently minimize risk exposures.
An Example of an Asset-Liability Committee
As mentioned, different institutions have different asset-liability committees comprised of various entity members.
For example, Alfa Bank’s ALCO is made up of those on the executive board and at least seven members with the right to vote for a 12-month period. Alex Fopiano of Massachusetts says that the committee’s head is appointed by those on the executive level, and members without the right to vote are assigned by the ALCO chair for the same duration.
The institution holds ALCO meetings every two weeks (more than the average of once per month). However, they’ve been known to hold more during stressful economic times.
Alfa Bank’s asset-liability committee resolves submitted matters, provided more than half of those with the right to vote attend the particular meeting. The members pass resolutions, which apply to employees throughout the business, if over 50% of voters are in favor.
