The Asset Liability Committee plays a large role in the strategizing and performance of a credit union. Understanding the ALCO’s role and how to organize and utilize an effective ALCO can be ever changing and worth reviewing. Whether you have a strong ALCO in place, are organizing your first ALCO, reorganizing your ALCO, or redefining the ALCO responsibilities, the following points may be helpful.

Establishing an effective ALCO reminded me of preparing to run a large and difficult whitewater rapid. My family and I are avid whitewater rafters and evaluating the ALCO process reminded me of some of the steps in preparing to run a technical and challenging rapid. Experienced boatmen know a rapid will change at different water levels, and they also anticipate there may be other obstacles in the river that were not there the last time. Most will take the time to get out of the raft and scout a large rapid. Part of the scouting process is to get to the best vantage point possible, then strategize how to line up the boat, where to enter the rapid, evaluate how the water is moving and breaking, then anticipate where adjustments or maneuvers will need to be made to avoid large holes or obstacles that are dangerous. Sometimes it even involves choosing between two less than desirable options and picking the less risky option. The strategizing and how the boatman will line up and enter the rapid can be the difference between a successful run and one that ends with passengers and equipment being put at risk. Just as running a credit union or many other events in life, including river rafting, no matter how long you observe, strategize, and plan, the actual run or experience is always different than the plan and improvisations and adjustments are to be expected.

The ALCO acronym could stand for “Always Looking Constructively” or to be solution and strategy oriented. The committee is sometimes like the boatman preparing to enter a rapid. They need to step away from the daily operations, move to the best vantage point possible, scout the environment, gather all the information available, then strategize how management and the board can set up and maneuver or avoid obstacles that could negatively impact the credit union’s performance and earnings. Regularly scheduled ALCO meetings allow for adjustments and revisions as events change and unforeseen challenges arise.

Credit unions are required by regulation to have a policy and process in place to identify, measure, monitor, manage, and control interest rate risk. The policies and controls start at and are set by the board of directors. The process is usually delegated to the ALCO. The committee oversight may also include investments, liquidity, funding, rate setting, and concentrations. It is essential that the committee be comprised of key decision makers within the organization or board to facilitate strong, collaborative discussions and evaluate the credit union operation from several points of view. The purpose of the committee is much greater than appeasing the regulators and should be strategic focused, identify exposures, develop responses to exposures, and oversee adherence to applicable policies. A well-functioning ALCO will be instrumental in the success and profitability of the credit union.

Just like scouting or looking at an upcoming rapid, the committee will look at or evaluate the credit union’s exposures to some of the following events and develop strategies or responses. This list is not all inclusive but is a good starting point.

  • Monitor changing interest rates.
  • Evaluate impact of changing rates to earnings.
  • Set loan and deposit rate to maximize profitability.
  • Know your competition loan and deposit rates.
  • Identify pressures to change loan and deposit rates.
  • Understand and anticipate changes in balance sheet composition.
  • Track loan and deposit trends.
  • Differentiate core funding vs. rate sensitive funding.
  • Estimate balance sheet term extension or shortening.
  • Monitor current liquidity position.
  • Forecast future liquidity needs.
  • Run stress liquidity scenarios.

When rafting a difficult and technical river that is new to the boatman, they prepare by gathering as much information as possible about the river. There are detailed river maps, other people who have run the river, and videos on social media available as resources. These are starting points but do not replace the scout on the day of the run. To evaluate and understand the credit union as well as the economic environment and competition, there are reports from sources such as the ALM models, current financial statements, financial ratios, trends, industry publications, and local and national rate data, to name a few. While this information is important, it does not replace the need for the ALCO to meet regularly, understand the credit union’s current situation, review, discuss, and strategize as they develop how to move forward and get the best results.

Having the right equipment in good working order can also help in the enjoyment and success of many sports or professions. A proper working interest rate risk and liquidity forecasting model is essential to an ALCO committee. The committee should understand the interest rate risk analysis, ensure the assumptions are reasonable and supportable, and capture all options such as balloons, steps, and calls. Sensitivity testing the major assumptions and taking a fresh look at the assumptions annually to ensure they still represent the credit union balance sheet is also prudent.

One final step, just like taking pictures of your adventure, the ALCO committee meetings, agenda items, discussions, decisions, and action items should be accurately documented and retained. Mark H. Smith, Inc. specializes in interest rate and liquidity risk analysis and assists clients and their ALCOs in understanding and utilizing the ALMPro Reports. If you would like us to help your credit union with interest rate risk analysis or get assistance in utilizing the reports to benefit and help during ALCO meetings, please contact us. We recently presented a webinar on this topic that is archived on our website.