What is Asset Liability Management (ALM)? Who are the members of ALCO and what are their responsibilities?
What is Asset Liability Management (ALM)?
Asset Liability Management (ALM) is an essential process for banks that manages the risks arising from mismatches between assets and liabilities on the balance sheet. It aims to ensure maximum structural balance sheet stability and optimum profitability while managing liquidity risk, interest rate risk, and market risk.
When not well managed, ALM creates a threat to the very existence of the bank. Banks must have their own ALM Policy — essentially approved by the Board of Directors. Bangladesh Bank issued the Asset-Liability Management (ALM) guideline through BRPD Circular No. 02 (March 2016) and updated it to align with global changes and Basel III requirements.
Constitution of ALCO
The CEO/Managing Director of the bank is the Chairman of ALCO. The Head of Treasury is the Member Secretary. The committee includes:
- Chief Executive Officer / Managing Director (Chairman)
- Head of Retail Banking and/or General Banking
- Head of Treasury (Member Secretary)
- Head of Corporate Banking
- Head of Finance / Chief Financial Officer / Head of FAD
- Head of SME / International Division / Commercial Customers
- Head of Risk Management Division (RMD)
Conventional banks with Islamic banking must include the Head of Islamic Banking. Banks with offshore banking must include a representative from the Offshore Banking Unit (OBU). The Head of the ALM Desk is a permanent invitee.
Responsibilities of ALCO
- Reviewing and analysing liquidity risk, market risk, and other balance sheet risks.
- Reviewing overall fund position — including loanable funds, CRR, SLR, LCR, NSFR, and Structural Liquidity Profile.
- Reviewing asset position — concentration and quality of the loan portfolio.
- Reviewing liability position — deposit mix, cost of funds, and market conditions.
- Reviewing foreign exchange positions — forward agreements, net FX liability, SWAP, OBU position.
- Reviewing economic and market outlook and its impact on the balance sheet.
- Reviewing interest rate risk in the banking book and trading book.
- Reviewing off-balance sheet positions — undrawn commitments, acceptances, guarantees, L/Cs.
- Reviewing leverage ratio, stress test results, VaR analysis, and gap analysis.
- Setting actions on pricing of deposits and lending products.
