An Asset-Liability Committee (ALCO) is a group within a financial institution, typically a bank or a financial services company, responsible for managing and overseeing the organization’s asset and liability management (ALM) functions. The primary purpose of ALCO is to ensure that the institution’s assets and liabilities are effectively managed to achieve financial stability, optimize risk and return, and align with the organization’s overall strategic goals.

Key responsibilities of an Asset-Liability Committee include:

1. **Interest Rate Risk Management:**
– ALCO monitors and manages the interest rate risk exposure of the institution. This involves assessing the impact of interest rate movements on the institution’s assets and liabilities and implementing strategies to mitigate potential risks.

2. **Liquidity Risk Management:**
– ALCO is responsible for ensuring that the institution has sufficient liquidity to meet its short-term and long-term obligations. This involves monitoring cash flows, maintaining an adequate level of liquid assets, and developing contingency plans for liquidity stress scenarios.

3. **Capital Adequacy:**
– ALCO assesses the capital adequacy of the institution. It considers the institution’s capital structure, regulatory capital requirements, and the need for additional capital to support growth and absorb potential losses.

4. **Funding Strategy:**
– ALCO develops and oversees the funding strategy of the institution. This includes determining the optimal mix of funding sources, such as deposits, borrowings, and capital, to support the institution’s lending and investment activities.

5. **Balance Sheet Management:**
– ALCO is involved in managing the overall composition of the institution’s balance sheet. This includes making decisions about the allocation of assets across various categories, such as loans, securities, and investments, as well as the structure of liabilities.

6. **Profitability and Performance Evaluation:**
– ALCO evaluates the financial performance of the institution and assesses the impact of its decisions on profitability. It considers factors such as net interest income, margins, and return on equity.

7. **Risk Appetite and Limits:**
– ALCO establishes risk appetite and risk limits for the institution. It sets guidelines and parameters for various risk exposures, including interest rate risk, credit risk, and liquidity risk.

8. **Regulatory Compliance:**
– ALCO ensures that the institution complies with regulatory requirements related to asset and liability management. This includes adherence to capital adequacy standards, liquidity regulations, and other regulatory guidelines.

9. **Market and Economic Analysis:**
– ALCO conducts market and economic analyses to assess the impact of external factors on the institution’s financial position. This involves monitoring economic indicators, interest rate trends, and other relevant market conditions.

10. **Communication and Reporting:**
– ALCO communicates its decisions and findings to senior management and the board of directors. It provides regular reports on the institution’s financial performance, risk exposures, and strategic initiatives.

ALCO plays a crucial role in the overall risk management and strategic decision-making processes of financial institutions. The committee’s efforts are aimed at ensuring that the institution maintains financial stability, operates within risk tolerance levels, and achieves its long-term objectives.