Bank liquidity risk management through stable and volatile markets: The role of the asset-liability committee and lessons learned for the balance sheet governance operating model
Abstract
This study examines the balance sheet management governance operating model of selected failed banks from 2007, 2008, 2009 and 2023, with emphasis on the corporate governance structure in place and the position of the asset-liability committee (ALCO), and draws conclusions and recommendations for future policy. All failed sample banks exhibited near-identical governance frameworks for management and oversight of balance sheet risk: namely an ALCO that reported to the senior executive management committee, and was at least two levels, if not three levels, below board level. It is inferred that, as the ultimate responsible and accountable forum for ensuring balance sheet viability and continuing going concern of the bank, the board would benefit from being closer to the balance sheet risk management process. This implies changing the governance structure such that the ALCO is closer to the board itself, and able to provide direct comfort to the board that the bank's capital and liquidity risks are being managed appropriately. The following bank governance measures are recommended, to be imposed by regulatory fiat if necessary:
•Direct delegated authority of the ALCO to manage the balance sheet, from a long-term robustness and viability perspective, directly on behalf of the board.
•The ALCO to report directly to the board, rather than via the executive management committee (or as an alternative approach, changed to become a sub-committee of the board). This recognises that the asset-liability management (ALM) discipline is at least as important as, if not more important than, the ‘audit’ oversight function undertaken by the board audit committee.
•Technical expertise at ALCO and board level that is capable of discerning the genuine capital and liquidity risk exposure position of the bank, on a medium-term forward-looking basis, at all times.
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Author's Biography
Moorad Choudhry is an independent non-executive director at Recognise Bank Limited, in London, and Honorary Professor at University of Kent Business School. He was latterly Treasurer, Corporate Banking Division at Royal Bank of Scotland. Moorad is a fellow of the Chartered Institute for Securities & Investment, and a liveryman at The Worshipful Company of International Bankers. He is author of ‘The Principles of Banking’ (John Wiley & Sons, 2012, 2023). E-mail: mooradchoudhry@gmail.com
Claire Trythall is Head of Treasury Risk at Newcastle Building Society. She was previously Head of Asset-Liability Management at Hodge Bank, and before that held positions at Barclays Bank, Tesco Bank and Cumberland Building Society, within the fields of asset-liability management and interest-rate risk management in the banking book. Claire has a first-class degree in banking and finance from the University of Derby and a higher national diploma in business from Staffordshire University. E-mail: mooradchoudhry@gmail.com
Diyama Abu Laban is Assistant Professor and Head of the Department of Finance and Banking at Birzeit University, Ramallah, Palestine. She obtained her PhD from Brunel University, London. E-mail: dlaban@birzeit.edu
Citation
Choudhry, Moorad, Trythall, Claire and Laban, Diyama Abu (2024, June 1). Bank liquidity risk management through stable and volatile markets: The role of the asset-liability committee and lessons learned for the balance sheet governance operating model. In the Journal of Risk Management in Financial Institutions, Volume 17, Issue 3. https://doi.org/10.69554/VPQL8530.
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