ALCO and ALM systems in banks explained

This post elucidates Asset Liability Committee (ALCO) that evaluates the risk associated with Assets and Liability of banks, financial institutions and also the practice of managing risks that arise due to mismatches between the assets and liabilities known as Asset Liability Management (ALM).

ALCO (Asset Liability Committee):  A risk management committee in a bank that evaluates the risk associated with the bank’s assets and liabilities is known as asset-liability committee (ALCO). It manages interest rate risk while ensuring adequate returns and liquidity. The committee consists of bank’s senior management including Chairman/CEO or ED who should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the bank (on the assets and liabilities sides) in line with the bank’s budget and decided risk.

ALM (Asset liability Management): ALM is the system of measuring and managing various risks banks or financial institutions that arise due to mismatches between the assets and liabilities exposed during the course of their operations. The Reserve Bank of India in its guidelines to manage asset liability mismatch, provides a mechanism to address the risk faced by the banks either due to liquidity or changes in interest rates.  Besides management of the credit risks, market risks and operation risks, ALM of a bank offers a comprehensive and dynamic framework for measuring, monitoring and managing liquidity, interest rate, foreign exchange and equity and commodity price risks that needs to be closely integrated with the banks’ business strategy.