alco sohail
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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
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ASSET-LIABILITYCOMMITTEE [ALCO]
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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
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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.
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- 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)
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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.
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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.
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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]
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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]