Discussion Points
     • Outline the responsibilities of an asset 
        liability committee (ALCO).
     • Discuss commonly observed ALCO best 
        practices in community banks.
     • Review areas of the ALCO policy and/or 
        ALCO activities that could be enhanced.
     • Discuss liquidity risk management.
     • Review new IRR guidance.
     • Discuss regulatory ALM modeling tips.
     • Introduce upcoming guidance on credit risk 
        analysis of investment securities.
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            Asset-Liability Committee (ALCO) 
                            Responsibilities
       ALCO Composition
       •  Senior management committee in a financial institution responsible for 
          coordinating the institution's borrowing and lending strategy, and funds 
          acquisition to meet profitability objectives as interest rates change.
       ALCO Responsibilities – Liquidity Risk Exposure
       •  The ALCO should actively monitor the institution’s liquidity profile and should 
          have sufficiently broad representation across major institutional functions 
          that can directly influence the institution’s liquidity risk profile (e.g., lending, 
          investment securities, wholesale and retail funding).
       •  For example, the ALCO will have responsibility for setting limits on the 
          arbitrage of short-term borrowing, while lending long-term 
          instruments. Among the factors considered are liquidity risk, interest rate 
          risk, operational risk and external events that may affect the bank's forecast 
          and strategic balance-sheet allocations.
       ALCO Responsibilities – Interest Rate Risk Exposure
       •  The ALCO should ensure that the risk measurement system adequately 
          identifies and quantifies risk exposure.
       Reporting 
       •  The ALCO will generally report to the board of directors and will also have 
          regulatory reporting responsibilities.  Reporting process should communicate 
          accurate, timely, and relevant information about the level and sources of risk 
          exposure.
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        Asset-Liability Management
      • Typically, asset-liability management 
        (ALM) is associated with reporting a 
        financial institution’s historical Gap, EVE, 
        and net interest income sensitivity results.
      • Ideally, ALM should involve an integrated 
        process between interest rate risk, 
        liquidity risk management, budgeting, and 
        strategic planning that includes the entire 
        bank; and develops future dynamic 
        strategies that balance risk and 
        profitability. 
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             ALCO Best Practices 
      Observed in Community Banks
     • Although there is no official written guidance that outlines regulatory 
       expectations of the ALCO, the following are ALCO best practices 
       observed by examiners of community banks:
       o Liquidity that is readily available, including the availability of 
         collateral to be pledged.
       o Credit lines accessible with material adverse change clauses readily 
         accessible to determine circumstances that would disallow use of the 
         lines.
       o Limitations on particular types of deposits that can be accumulated, 
         for example, municipal deposits.
       o ALCO package that includes a 1-page summary covering all key 
         model assumptions including any recent changes to the 
         assumptions.
       o Funding diversification guidelines.
       o Establishing targets and composition mix of the investment portfolio.
       o IRR and liquidity limits that require action vs. additional discussion 
         (e.g., Red, Yellow, Green).
       o ALCO packages that show level and trends vs. just showing the level 
         specifically for risk limits.
       o Cash flow coverage for runoff of collateralized deposits.
       o Testing credit lines at least annually.
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                   ALCO Best Practices 
            Observed in Community Banks 
                              (con’d)
      • Although there is no official written guidance that 
         outlines regulatory expectations of the ALCO policy, 
         the following are ALCO policy best practices observed 
         by examiners of community banks:
          o Has substance, structure and focus.
          o Ties-in other policy parameters, e.g., Investment 
            Policy guidelines and the impact on liquidity.
          o Includes description of how key assumptions are 
            determined, and the source documents used to make 
            the assumptions.
          o Includes minimum risk limits for maintaining liquid, 
            unencumbered assets.
          o Includes a definition of liquidity assets.
          o Outlines expectations for independent review.
          o Includes funding risk limits by maturity, e.g., limits 
            on short-term, wholesale funding).
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