Guidelines for Board ALCO Responsibilities

Learn IRR basics, as well as sources of other potential risks, risk measurement techniques and risk mitigation strategies.
Provide appropriate guidelines for risk-tolerance levels. The board sets the tone for risk tolerance, including quantitative risk limits, and both permissible and impermissible activities.
Establish and conduct annual reviews of ALM, investment, liquidity and concentration policies.
Monitor exposures with careful review of policy violations. This is usually performed at least quarterly.
Keep the full board informed of ALCO activities.
Understand the credit union's risk position and actual performance, compared with stated objectives and relative to peers.
Stay current on economic news and issues.
Ensure that every major strategy or new business has a supporting ALM "what if."
Become educated on risk management by reading credible articles or attending conferences.
Review and approve the strategic goals and objectives prior to proposing them to the full board.
Assist in formalizing capital plans.
Be committed to board responsibilities related to the ALCO.

Actions the Board ALCO Shouldn't Take

Set rates.
Allow personal concerns as a credit union member to override the fiduciary duties of a board member.
Micromanage management.
Develop strategies that are inconsistent with risk tolerance levels; i.e., high ROA targets with low credit and interest rate risk.
Forecast or bet on rates – balance sheet and investment strategies should be independent of rate forecasts or rate bets.

ALM Policies

One of the most effective tools the board can provide to management is a sound policy directive for the credit union's various activities and risk exposures. Sound policies consolidate the board's expectations for interest rate and liquidity risk exposures and oversight. According to the Federal Reserve System Community Banking Connection (2013) "Effective Asset / Liability Management: A View from the Top" by Doug Gray, below are what examiners look for in ALM policies:

The policy should state the credit union's objectives and provide a well-articulated strategy for management risks associated with balance sheet accounts.
It should set appropriate aggregate risk limits for interest rate and liquidity risk exposures. Risks should be set in relation to earning and capital exposures usually framed in terms of limits to net interest income, net income and/or the economic value of equity.
Policies should address forward-looking analyses for sound liquidity risk management.
Risk limits should address the credit union's activities and be reevaluated periodically in light of other risks such as credit, operational and reputation, as well as any new products or business activities.
The policy should provide clear lines of authority, responsibility and accountability.
The policy should delineate the types of activities that an institution may conduct. This might include which types of financial instruments or activities are permissible.
When managing liquidity risk, the policy should indicate what types of funding are acceptable.
If the credit union uses derivatives, the policy should address the appropriate use of these instruments, including a discussion of permissible derivative activities, an independent review of derivatives and the effectiveness of hedging activities.

ALM Validation

At times, management or even the board may be uncertain about the accuracy of the underlying ALM reports, making it vital to seek a validation. This is critical, given that strategy development depends on the validity of these reports.

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What is the Credit Union Board's ALCO Role?

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