There is an architecture design concept that says, "form follows function." Once the ALCO has determined what it must do, it must inventory the resources at hand as well as those necessary to make it successful. Among these resources are the men and women within your company whose abilities and perspective will contribute to achieving the goal. It is safe to assume that the general purpose of the ALCO is to control the behavior of the net interest margin by understanding and controlling the factors that affect margin.


By working with as many financial instructions as we have, we can categorize them into four basic types driven by their strategies. These strategies are lending, investment, marketing and cost control. These can also be seen in the make-up of the ALCO. A lending drive company will populate its ALCO with lenders, while an investment focus company will tend to center their ALCO activities around investment decisions. Cost control financial institutions do not have ALCOs because they don’t have the time, everyone’s too busy.

The make-up of the ALCO can also speak volumes about the company’s leadership. It is not uncommon that the president is not in attendance if the impact is considered minimal to the organization. Asset-liability management IS the definition of banking. The president’s presence underscores the importance of the process, maintains strategic direction, and gives authority to the action plans developed. With that then it is imperative that every president be involved in the ALCO.

We do not want to forget that interest rate risk analysis is a support function to the entire planning process. An ongoing asset-liability management function makes the planning process dynamic and flexible. The concept of a rigid budget, cast during the early days of winter, and blindly adhered to throughout the year is practically prehistoric. Asset-liability management is not an isolated number crunching activity carried out by a computer guru or someone in accounting, or data processing, but rather, the ALCO process is a continual planning process. In that effort, contributions must include the major areas of the company, i.e. senior management, Investments, Lending, New Accounts and Marketing. We live I a very dynamic environment. Plans must change to follow the changing landscape as described by competition, rates and customer behavior.

Often when I suggest the inclusion of New Accounts and Marketing, I get a look as though I’m a little bit crazy. Consider however, the ALCO goal. If asset-liability management is controlling the behavior of the net interest margin, then we must understand and use all the behavior influences at our disposal.

What influences the behavior of the net interest margin? National economic rates such as the yield curve and prime, local economic conditions, and the behavior of our customers. Customer behavior is not only influenced by rates, but also by marketing, sales and advertising. You must decide if your New Accounts people are order takers or sales people. Can they influence customer behavior or just help the customer fill out the forms?

Through marketing, sales, and advertising you are asking those customers to do business with you in a certain way. You can be passive and let them simply select from your product list, or you can try to steer them toward those products and services you want to promote. For example, all financial institutions have a rate board and I once had a banker but a "Best Value" sticker next to the CD they wanted to push, thereby influencing customer behavior. We see this work when selling other consumer goods, why not yours.

As part of the ALCO process, marketing and New Accounts can provide valuable information regarding customer preferences and trends that the executive level is not aware of because that are not on the front line. In addition, as part of the action plan process, they will be aware of the reasons for promoting one product over another and increase communication between the various levels within the organization.

In conclusion, ALCOs fail because those in a position to influence margin behavior fail to anticipate, fail to prepare and fail to execute the plan. This occurs because ALCOs lack clearly stated goals, use inappropriate tools, and eliminate valuable members of the organization from the ALCO meeting.

If you give intelligent people good information, they will reach the right answers. If you communicate your intentions and ambitions to the other members of your team, they will help you reach your goal. I guarantee your ALCO will not fail.

Don't forget to check out parts one and two of this series!