What is an active-passive committee?
An Asset Liability Committee (ALCO), also known as surplus management, is a monitoring group that a company employs to coordinate the management of assets and liabilities with the goal of generating adequate returns. By managing the assets and liabilities of a business, executives are able to influence net earnings, which can translate into higher stock prices.
Understanding asset-liability committees (ALCO)
An ALCO at board or management level provides important management information systems (MIS) and monitoring to effectively assess the risks on and off an institution’s balance sheet. Members integrate interest rate risk and liquidity consideration into a bank’s business model. One of the objectives of the ALCO is to provide adequate liquidity while managing the bank’s spread between interest income and interest expense. Members also take into account investments and operational risks.
ALCO meetings should take place at least quarterly. Members’ responsibilities generally include managing market risk tolerances, establishing an appropriate MIS, and reviewing and approving the bank’s cash and cash management policy at least once a year. year. Members also develop and maintain an emergency funding plan, review immediate funding needs and sources, and determine liquidity risk exposures to adverse scenarios with varying probability and severity.
Liquidity policy guidelines
Strategies, policies and procedures must relate to the goals, objectives and risk tolerances of the board of directors regarding operating standards. Strategies should articulate tolerances for liquidity risk and determine to what extent central elements of fund management are centralized or delegated within the institution. Strategies should also indicate the extent to which the focus is on using liquidity of assets, liabilities and operating cash flow to meet daily and potential funding needs.
Example of an active-passive committee
Alfa Bank’s ALCO is appointed by a resolution of the bank’s board of directors and includes seven or more members with voting rights for a period of one year. ALCO is chaired by the President of ALCO appointed by the bank’s board of directors. ALCO members without the right to vote are appointed upon presentation to the ALCO president by order of the bank management board from among the bank’s specialists and managers for a period of one year.
The bank’s ALCO meetings are generally held every two weeks. Additional meetings can be scheduled as needed. The ALCO has the power to resolve questions under consideration if more than half of the voting members are present at the committee meeting. A resolution is adopted when more than half of the members with the right to vote are present and vote in favor of the resolution. ALCO resolutions are binding on all bank employees.