What it means
A bank's balance sheet is its business model: deposits and borrowings fund loans and securities, and the mismatch between the two sides creates risk. The asset-liability committee is the supervisory group that manages that mismatch.
It typically includes the chief financial officer, treasurer, chief risk officer and senior business heads, and it reports to the board. The committee's core duties are practical.
It sets market risk tolerances, oversees the management information systems that measure on- and off-balance-sheet exposures, and reviews the liquidity and funds management policy at least annually. Most ALCOs meet at least quarterly, and many meet monthly or more.
Interest rate risk is the classic ALCO problem. When rates move, assets and liabilities reprice at different speeds, and net interest income moves with the gap between them.
The committee monitors that gap by time bucket and runs scenarios to see how earnings hold up under rate shocks. Liquidity is the second pillar.
The ALCO maintains a contingency funding plan, reviews immediate funding needs and sources, and judges how the balance sheet survives severe but plausible stress. The 2023 failures of Silicon Valley Bank and Signature Bank showed how fast duration losses and deposit flight can combine, and regulators including the FDIC have since reinforced expectations for liquidity governance in supervisory manuals such as Section 6.1 of its Risk Management Manual of Examination Policies.
Strategy ties it together, since ALCO policies must reflect the board's goals and risk appetite, including how much funding is centralised, how lending is diversified across sectors, and how much of daily funding comes from asset liquidity versus liabilities. One distinction matters for readers: asset-liability management is the discipline, while the ALCO is the committee that directs it.
Small organisations sometimes merge the two ideas, but in a regulated bank the committee is a formal governance body with documented charters, minutes and board reporting. Many ALCOs also own funds transfer pricing, the internal rate at which business units are credited for deposits and charged for loans.
That price decides which products look profitable, so the committee's choices quietly steer the whole institution's growth. It is one of the least visible and most powerful levers the committee holds.
In practice
Real-world examples.
Example
An ALCO reviews its deposit beta assumptions after a central bank hike, because repricing deposits faster than expected compresses the margin.
Example
A committee caps lending to commercial real estate at 25 percent of the loan book to keep sector concentration within board limits.
Example
A quarterly ALCO meeting approves the annual refresh of the contingency funding plan and documents the vote for examiners.
Formula
Calculation
Repricing gap = Rate-sensitive assets - Rate-sensitive liabilities, measured in each time bucket. The change in net interest income from a rate shock is approximately the cumulative gap x the rate change.
Worked example. A bank has $600 million of assets and $800 million of liabilities that reprice within 12 months.
- 12-month gap: $600 million - $800 million = -$200 million
- Rates rise by 100 basis points (1%): -$200 million x 1% = -$2 million, so annual net interest income falls by roughly $2 million
- If rates fell by 100 basis points instead, the same negative gap would add roughly $2 million.Case study
Seen in the real world.
This fictional case study shows the committee in action. Meridian Savings Bank, a fictional lender, finds itself with a negative 12-month gap after piling into long-term bonds. Its ALCO shortens the securities portfolio's duration, raises deposit betas in its model after two rate hikes, and tests a contingency funding plan against a 20% deposit outflow.
The board approves the revised risk limits. In this illustrative story, the committee also sets a trigger so that any gap beyond its limit is escalated to the board within a week. The episode shows the committee's real value: catching a drift in the balance sheet while it can still be corrected with ordinary tools.
Watch out
Common mistakes.
- Running ALCO as a reporting formality. A committee that only reviews slides without setting limits and challenging assumptions fails its governance purpose. Examiners read the minutes, and thin minutes read as thin governance.
- Operating without a contingency funding plan. Stress arrives faster than committees can improvise, and regulators such as the FDIC expect a documented plan.
- Letting concentration build quietly. Heavy exposure to one sector or one funding source turns an ordinary rate move into a solvency question.
Questions
People also ask.
Who sits on an ALCO?
Usually the chief financial officer, treasurer, chief risk officer, and heads of the major business lines. The committee reports to the board, which approves its charter and risk limits.
How often does an ALCO meet?
At least quarterly at most institutions. Banks facing volatile rates or tight liquidity often meet monthly or even every two weeks. Special sessions are also called when markets move sharply or a funding source dries up.
What is the difference between ALCO and ALM?
Asset-liability management is the discipline of balancing assets and liabilities. The ALCO is the named committee that directs that work and answers to the board.
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