What it means
The committee exists because assets and liabilities are usually mismatched by nature. A bank lends for twenty-five years at fixed rates and funds itself with deposits that can be withdrawn tomorrow, and somebody senior has to own the risk that creates.
ALCO is where that ownership sits, typically chaired by the chief executive or chief financial officer with the treasurer, chief risk officer and heads of lending in the room. Membership matters because the committee has to balance competing interests.
The lending side wants to write more loans, the deposit side wants to pay less for funding, and the risk function wants the whole thing to survive a stress scenario. Bringing them into one forum forces trade-offs to be made explicitly rather than by whoever moves fastest.
A typical agenda covers the interest rate outlook, the repricing gap between rate-sensitive assets and liabilities, liquidity ratios and funding concentration, deposit pricing decisions, hedging proposals and the results of stress tests. The committee also sets and reviews limits, such as the maximum acceptable change in net interest income for a given rate move.
Minutes and limit breaches are usually reported straight to the board's risk committee. The main tools are practical rather than exotic.
ALCO can change deposit and loan pricing to attract or discourage certain balances, alter the mix and maturity of wholesale funding, buy or sell securities, and enter interest rate swaps to convert fixed exposure into floating or the reverse. Each lever changes the shape of the balance sheet rather than the individual transactions.
Regulators treat the committee as a core piece of governance. Supervisors expect documented terms of reference, appropriate seniority, regular meetings, clear limits and evidence that breaches were escalated and acted on.
A committee that meets sporadically or rubber-stamps the treasurer's decisions is a recognised warning sign in a supervisory review.
In practice
Real-world examples.
Example
A credit union's ALCO meets monthly and notices that 40% of its deposits now come from a single employer scheme. It sets a concentration limit and instructs the treasury team to build a retail deposit channel. Funding risk is reduced before it becomes a problem.
Example
A life insurer's committee reviews the duration of its bond portfolio against the expected timing of policy payouts. A gap of two years is identified in the ten to fifteen year bucket. The committee approves the purchase of longer-dated government bonds to close it.
Example
A building society's ALCO decides to raise its two-year fixed savings rate ahead of competitors. The aim is to lock in funding before an expected rate rise rather than to win market share. The pricing decision is minuted with the rate view that drove it.
Formula
Calculation
Repricing Gap = Rate-Sensitive Assets - Rate-Sensitive Liabilities
Change in Net Interest Income = Repricing Gap x Change in Interest Rate
Rivermount Bank has total assets of $800,000,000. In the zero to twelve month repricing bucket it holds $420,000,000 of rate-sensitive assets and $560,000,000 of rate-sensitive liabilities.
Repricing gap = $420,000,000 - $560,000,000 = -$140,000,000, a negative or liability-sensitive gap.
Gap ratio = $420,000,000 / $560,000,000 = 0.75.
Gap as a share of total assets = -$140,000,000 / $800,000,000 = -17.5%.
If interest rates rise by 1%, the effect on annual net interest income is -$140,000,000 x 0.01 = -$1,400,000, because more liabilities than assets reprice upwards within the year. ALCO's job is to decide whether a potential $1,400,000 hit is acceptable, or whether to close the gap by lengthening deposit maturities, shortening fixed-rate lending or using swaps.Case study
Seen in the real world.
Pennygate Mutual Bank is an illustrative, fictional community bank used to show an ALCO doing its job. Its committee reviewed the three-month repricing bucket and found $120,000,000 of rate-sensitive assets against $200,000,000 of rate-sensitive liabilities, a negative gap of $80,000,000.
With economists forecasting a possible 2% increase in policy rates over the following year, the committee calculated the exposure directly: $80,000,000 x 0.02 = $1,600,000 of annual net interest income at risk, against a budgeted profit that made that number uncomfortable. The lending team had been winning business by offering five-year fixed mortgages funded largely by short-term deposits.
ALCO responded with three linked decisions: cap new five-year fixed lending for two quarters, launch a three-year fixed savings bond to lengthen funding, and enter interest rate swaps covering $50,000,000 of the fixed mortgage book. In this illustrative example the value of the committee was not the sophistication of the tools but the fact that lending, savings and treasury were made to solve the problem together.
Watch out
Common mistakes.
- Treating ALCO as a treasury meeting rather than a senior decision-making body, which leaves lending and deposit pricing outside the risk conversation.
- Reviewing the repricing gap alone and ignoring liquidity, funding concentration and the behavioural maturity of deposits that can leave at any time.
- Setting limits and then never escalating breaches, which regulators regard as a governance failure regardless of whether losses occurred.
Questions
People also ask.
Who normally sits on an ALCO?
Typically the chief executive or chief financial officer as chair, plus the treasurer, chief risk officer, and the heads of lending and deposit-gathering functions.
How often should it meet?
Monthly is the common pattern for banks and building societies, with the ability to convene at short notice when rates move sharply or funding conditions tighten.
Is an ALCO only for banks?
No, insurers, pension schemes, credit unions and large corporate treasuries run equivalent committees wherever the timing of cash inflows and outflows has to be actively managed.
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