By Cynthia R. Walker, CEO
I recently returned from a business trip that was packed with many appointments and extensive driving from one client to another, with a tight schedule between appointments, in a region of the country that I was not familiar with. During this trip, I used and depended on an app on my smart phone to assist me in navigating from one location to the next. I would put the destination into the app and it would present me several options and also indicate the anticipated drive time per option, potential road obstacles and current traffic conditions. I would choose the route and then follow the surprisingly accurate commands given to me by my phone. I was very grateful I did not have to rely on the old fashioned map and sometimes confusing road signs to get me from one place to the next.
A functioning ALCO has some parallels to the experience described above. The ALCO is charged with some very defined responsibilities and may be compared to the phone app. The committee reviews all the variables with the information available and presents the best course of action for the credit union. To accurately guide a driver through a maze of interchanges, in many locations, a good app does not come about without a lot of background work and input from many outside sources. The same holds true in this comparison. The ALCO needs to be comprised of strong decision makers from key areas of the organization who bring a breadth of knowledge and a wide range of experience to arrive at the best recommendations.
Assigned with the following goals, the committee will evaluate possible scenarios and give guidance and direction to the board and management:
- Preserve or improve earnings
- Recommend loan and dividend rates
- Establish equitable rates to the borrower and saver
- Anticipate pressure on loan and deposit rates
- Monitor potential exposure to changing interest rates
- Anticipate changes in loan products
- Review investment strategies and possible changes
- Evaluate funding mix and potential shifts
- Monitor liquidity positions.
The focus of the committee should be strategic. A comprehensive agenda with many of the items above listed for review becomes crucial for a good meeting. Various reports will be needed to provide the information needed for strategic discussions and may include:
- Interest rate risk reports and trends
- IRR assumptions
- alternative rate scenarios (be careful to not get carried away)
- current liquidity positions, what is available now
- forecasted liquidity scenarios, what will be the need in the future
- economic conditions that may impact IRR and liquidity
- current credit union rates
- market rates
- current earnings
- current balance sheet composition
- new products and promotions
The ALCO’s evaluation of potential problems against desired outcomes will result in several recommended routes or plans of action to help management. As with any trip, whether it be long or short, there is always the potential for complications and trouble. The purpose of the credit union ALCO and management is to understand possible problems, then anticipate and prepare for potential obstacles.
Another responsibility of the ALCO is to compare current operations and forecasts to established policy limits and to communicate their discussions and conclusions to the board of directors. It is essential that the board be kept informed on a monthly or quarterly basis depending on the credit union’s size and complexity. The committee should issue a warning when the results are trending toward violation of the limits and recommend a plan to correct problems.
If we were all risk avoidant, we would not leave our house, go on a trip, or go to work. But the world does not work that way. Therefore, the goal of credit union management with the assistance of the ALCO is to map out a balanced strategy. What if being part of the ALCO was as easy as to input the many variables from above into an app and the recommended route was presented? Too bad so many of the options are out of the control of the credit union. It would be like the road being moved without much warning.