The Asset-Liability Committee: Ensuring effective balance sheet risk management during a market-wide stress event

Abstract

Risk management in banking is universally the ultimate responsibility of the board of directors. That said, boards generally delegate various aspects of this responsibility to various executive management committees. Stewardship of the bank’s balance sheet is given typically to the Asset-Liability Committee (ALCO). The mere existence and operation of an ALCO is not sufficient to prevent banks failing however, as the events of 2008 showed. Twelve years after that period, the markets are experiencing another global stress event, this time the impact of the coronavirus pandemic. This brings under focus again the role and effectiveness of the ALCO, as banks strive to assist their customer franchise while simultaneously ensuring the maintenance of balance sheet viability. The author assesses the factors that an ALCO must address if it is to remain fit-for-purpose during an economic crisis, and what specific operating methods and culture it should operate under. The paper concludes that an open culture at ALCO, which fully debates all issues is a key ingredient in this regard. Other aspects of importance include an appropriate governance structure, membership and reporting suite of risk indicators.