The senior management in the FI must be fully committed to integrating risk management into everyday operations and strategic decision-making in order for the risk management process to be successfully implemented.The Board should be in charge of overall market risk management, select the FI's risk management strategy, and establish upper and lower bounds for liquidity, interest rate, exchange rate, and equity price risks.
The
ALCO is a decision-making unit made up of the senior management of the FI, including the CEO,
and is in charge of strategic management of interest rate and liquidity
issues as well as integrated balance sheet management from a risk-return perspective.While each FI
will have to determine the function of its ALCO, its
authority, and the
decisions that will be made by it, its duties would
typically include:
Articulating
the current
interest
rate view and a view on future direction
of
interest
rate movements and basing its decisions for future business strategy on this view as well as other parameters
considered
relevant;
Monitoring the market risk levels of the FI by ensuring adherence to the various risk-limits set by
the Board;
Choosing a business strategy for the FI that is compatible with its interest rate outlook, financial
constraints, and predetermined risk management goals on both
the
assets and liabilities sides.This
in turn
would comprise:
Ø determining the desired maturity profile and mix of the assets and liabilities;
Ø product pricing for both - assets as
well
as liabilities side;
Ø deciding the funding strategy i.e. the source and mix of liabilities or sale of assets; the proportion of fixed vs floating
rate funds, wholesale vs retail funds, money market vs capital market funding domestic
vs foreign currency funding,
etc.
Reviewing the results of and progress in implementation of the decisions made in the previous meetings
Analysis, monitoring, and reporting of the risk profiles to the ALCO should be
the
responsibility of the
ALM
Support Groups made up
of operating
staff. Additionally,
the
staff should
create projections (simulations) that show how various potential changes in
market conditions
will affect the balance sheet and suggest the
necessary steps to stay within
FI's
internal limitations.