ALCO SOhail

8/8/2019 ALCO SOhail

1/11

Asset-Liability

CommitteeALCO

Bank Asset and Liability

Management

MBA

Banking & Finance

Group D

Group Members:

Warda Chaudhry 40124Moaz Ahmad 38625

Sohail Akhtar 39843

Laila Matloob 40125

Muhammad Shahzad 40149


2/11


3/11

ASSET-LIABILITYCOMMITTEE [ALCO]

Page3 of11

Organizational Risk Management Structure

Source: www.capitecbank.co.za/ir/about/corporategovernance

INTERNAL

AUDIT

RISK

COMMITTEEE

ALCO

Treas ry Cre

Ris

DerivativesRis

LiquidityRis

Capital

Manage

ent Interest

RateRis

Large

Exposures Liquidity

Crisis

OPERATIONALRISK

COMMITTEE

Outsourcing Policy

Compliance Policy

Operational Ris

Corporate Governance

Complaints Handling

FraudInvestigations

Business Continuity Fit &

Proper

CREDITRISK

COMMITTEE

Credit Ris

Credit

Control Credit Card

Lending

BOARD

AUDIT

COMMITTEE


4/11


5/11


6/11


Page6 of11

segments or target customers. Following the competitive analysis ALCO makes economic

assessmentswhere itassesses macro economicvariablesrelatedto organizational operations.

After acquisitions offunds ALCOthendistribute fundsfor opti mum use.Theninfinal decision

making ALCO make cashprojections, coordinated investment and assign responsibilities to

members.

Asset/liability management can trigger a strategic response when problems emerge when

planning to obtain or deploy funds. New markets,newproducts, and new promotions will

resultas local competitionwithin a regulatory protected environmentgivesway to nonbank

competition. Inflation,high interest rates, technology, and more permissive legislationhave

alteredthe operating environment. ALCOisresponsible to:

- Ensuresthatall financial strategy decisions are takenin line withits objectives

- Manage the overall financial managementandriskassessmentof the whole financialinstitute. Its supervisory authority make sure that financial institute identifies and

manages the financial riskand implements the proper measures to control the risk

according to the overall risk frame work, ALM Policy, Treasury Policy and other

municipal regulation and legislations.

- Reviewthe variance analysis andforecasting ofcashflow asperthe regulation laid by

ALMunitand analysisits effects onthe city.

- Make sure thatall limits andfinancial riskguidelines are within acceptable levels andnone ofthese limitscrossthe setlevel withoutits authority

- Ensures ALM framework, ALM Policy and Procedures are reviewed annually and

recommendation are made. ALM HR recourse is verified so that ALM can perform

tasks.

- Maintainthe maximum profitability and limitthe possible risklevel, ALCO managestheoptimal structure ofthe Banks balance sheetanddisclosedthe liabilities and assets as

well asthe contractual obligations all time withinthe guidelines ofALM Policy.

- Controlsthe overriskdiversification andthe capital adequacy.

- Execute the interest policy uniformly and manage liquidity risk after analyzing theliquidity gap, loanto depositratio,future liquidity needs,currentfundingcomposition

etc.

- Make the banks marketcapital policy

- Controls the important bank performance ratios i.e. ROE, ROA etc as stated in bank

policy anddetermine the courses ofactions.


7/11


Page 7 of11

- To validate FTP rules modifications,whenthey are presentedto ALCO.- Controlsthe trading ofcurrencies,state securities,derivatives andshares etc.

OBJ

CTIV

S

The main objective ofALCOisto manage any offinancial risks on annual basis,whichinclude

global interest rate risk, liquidity risk, and exchange rate risks.Board ofdirectors ofALCO

naturally responsible to watch overprocedures annually, and it includesreview of financial

riskmanagement policies.Itoverseesthe doings ofthe executive intheir objectives andto

make sure thatpolicies and limits are set, ALCO monitors all activitieswhichcome underthe

scale of the financial risk management policy. It also monitors the pricing of products and

Executivesdecisionregardinginvestments made in orderto reduce the risks.

Jim Clarke, (2004), mentions in an article that assets and liabilities committee decides on the

maintenance ofinterestrate expectations and approve ifany particular actionisrequireddue

to agreed interest rate view. ALCO review the financial riskmanagement controls on daily

basis and allow any changes to policy in terms of interest rate sensitivity analysis and also

keep an eye onthe managementofinterestrate risk.The ALCO monitors balance sheetandset

guidelinesto control the marketvalue and earningriskand examine the impactofthe riskon

net interestmargin and allow any action ifrequired andhowprepayments affectthe market

value and earningrisk.

Ledgerwood and White (2006), statesthatone ofmain objective ofALCOistakingdecisionsregardingfunding andsettingitsparameters. As ALCOcomesunderthe Executive department

that is why before taking any action related to funding composition, ALCO look up for

executive recommendation and then authorize any requiredchanges. Financial riskpolicy is

beingreviewed ondaily basis and a checkon adequacy of liquidity andcontingency funding

policy.

Assets and liabilities committee is also responsible for considering and authorizing any

adjustment concerning liquidity investments and liquidity requirements that have been

recommended by executive and over view financial risk management policies frequently.

ALCO monitorsthe liquidity necessity andsetthe standards accordingto the standardsgiven

in FSAshandbookanditincludes a periodically checkandsetguidelinesin orderto manage

liquidity risk. Jos and Ramos (2000)


8/11


Page8 of11

The presence of the head of the risk management Department is necessary in order to

establish a potential source ofopposition.This oppositionisnecessary in orderto validate the

rules andthe strategiesproposedduringthe ALCO asstated by Adam (2007,p.87).

ALCO objectives include managing and monitoring treasury credit risk and suggest any

changes to addition investment counterparties, ensuringdecisions to be takenunder credit

riskpolicy and its been checked on semi annual basis. ALCO also typically analyze the net

interestmargin and markany necessary actionsto be takenin orderto maintaininterestrate

margin anditre-examinesthe profitperformance and monitoritsvariances andits effects on

net interest margin and how profit is generated from the substitute in the liquid assets

accordingly to marketvalue andsetthe guideline in accordance to manage the financial riskmanagementpolicies.

ALCO is also responsible to manage,notonly risks related to balance sheet, butalso other

matters like providingguidelines andparameters linkwiththe functioning ofmarketing and

salesin orderto improve andgetbetterproductmix and ALCO also takesdecisionsin orderto

recruit and required training for members of Board, senior management and ensures

appropriate andskilled staff ishired in order to getmaximum results, monitor andresolve

riskmatters.

CONCLUSION

After looking at the functions and objectives of ALCO we concluded that every financial

institute must have a senior management formed committee for balance sheet risks

management.The committee should meetonce in a monthto analyze,review and formulate

strategy for managementofbalance sheetrisk.

Points of discussion should be arranged and action points should be highlighted to better

position the balance sheet. Past meeting points should also be reviewed to ensure

implementation.Mostfocusing areasshould be:

y

Depositmobilization or assetgrowthto minimize assetliability mismatch.y Shortand longterm cashflowsshould be based on marketinterestrates and liquidity.

y Detailedplanto addressthe limitsin breach andin line to bringthem undercontrol.

y Addressto all regulatory issues.

y Incontingency situationsspecial orurgentmeetingsshould be arranged.


9/11


Page9 of11

Financial institutes internal control structure is critical to its safe and sound functioning

generally and to risk management system particularly. Establishment and maintenance of

effective system of controls, including the enforcementof official lines of authority and the

appropriate separation ofdutiessuch astrading and backoffice is one of the managements

more importantresponsibilities.Segregation ofdutiesis a fundamental and essential element

ofsoundriskmanagementandinternal control system.

Any failure in implementation and maintenance of adequate separation of duties can

constitute an unsafe and unsound practice and can lead to serious loss. Moreover,

compromise infinancial integrity ofany institutioncanresultindeficiency ininternal controls

and can warrant a serious penalty or action. Good structured system of internal controls

promotes effective operations and reliable financial and regulatory reporting,protection of

assets and ensuresthe relevantlawsto be compliant.


10/11


Page10 of11

References

BOOKS

y A,Kumar, D.P.Chatterjee,C.Chandrasekhar, D.G. Patwardhan,2005,Risk Management,

RajivBeriforMacmillanIndia Ltd. Ansari Road, Darvaqani Road, Delhi.

y Adam A. Handbook of Asset and Liability Management: From Models to Optimal Return

Strategies, JohnWiley & SonsLtd,WestSussexLondon,(2007)

y Dermine, Jean, and YoussefF.Bissada. Asset and Liability Management: The Bankers Guide

to Value Creation andRisk Control.2nd edition. Harlow, UK: FT Prentice Hall,(2007)

y Jos A. Soler Ramos. Financial risk management: a practical approach for emerging

markets IDB PublicationsSection, NorthCharlesStreet,(2000)

y Ledgerwood. J, White. V. Transforming microfinance institutions: providing full financial

services to the poorNaylor DesignWashington DC,(2006)

y Tilman, Leo M. (ed). Asset Liability Management of Financial Institutions: Maximizing

Shareholder Value through Risk-Conscious Investing. London:Euro money,(2003)

Articles

y

Blommestein, H. J., and F.K.Kalkan. S

overeign assetand liability managementPracticalsteps towards integrated risk management. Bank- en Financiewezen/Revue Bancaire et

Financire Issues67(2008):360369.

y Buehler, Kevin, and Anthony Santomero. How is asset and liability management

changing? Insights from the McKinsey Survey. The RMA Journal90:6 (March2008): 44

49.

y Detemple, Jrme, and Marcel Rindisbacher. Dynamic asset liability management with

tolerance for limited shortfalls.Insurance: Mathematics and Economics 43:3 (December

2008):281294

y William C. Handorf, Michael P. McCarthy. Asset and liability management, form and

function ofthe committee Federal Home LoanBankBoard Journal.(April, 1984)

Web Links

y AssetandLiability Management-creditrisk Available from: http://www.almbank.com/

[Accessed28th November2010]


11/11


Page11 of11

y Practical issuestoday the role ofALCO inrisk/reward: RMA presents a series ofarticlesdesigned to help community and super-community banks get a foothold in their

managementofmarketrisk Available from:

y http://findarticles.com/p/articles/mi_m0ITW/is_5_86/ai_n14897448/pg_2/?tag=content;col1 [Accessed28thOctober2010]

y http://findarticles.com/p/articles/mi_m0ITW/is_5_86/ai_n14897448/pg_2/?tag=content;col1 [Accessed28thOctober2010]

y Assessment and Development of ALM and ALCO Available from: http://www.xmi-associates.com/alco.html [Accessed29th November2010]

y Asset-Liability Committee ALCO Available from:

http://www.investopedia.com/terms/a/asset-liability-committee.asp [Accessed 29th

October2010]

y ALCOTerms ofReferenceAvailable from:

http://www.leedsbuildingsociety.co.uk/about/alco.html [Accessed30thOctober2010]

y "Passthe aspirin":handlingthe ALCO [AssetManagementLiability Committee]challenge.(Community Banking). Available from: http://www.allbusiness.com/finance/336061-

1.html [Accessed30thOctober2010]

y Asset-Liability Committee ALCO BankRatings. Available from:http://www.thestreet.com/topic/22287/asset-liability-committee--alco.html [Accessed

29thOctober2010]

y Asset/Liability ManagementCommittee Available from:http://www.fedpartnership.gov/bank-life-cycle/start-a-bank/asset-liability-management-

committee.cfm [Accessed30thOctober2010]

y http://www.global-rates.com/interest-rates/libor/british-pound-

sterling/british-pound-sterling.aspx[Accessed20March2010].

y Riskmanagementframeworkandresponsibility, Available from:

http://www.capitecbank.co.za/ir/about/corporategovernance [Accessed 30th OCTOBER

2010]

Documents

ALCO SOhail