The Dreaded ALCO Meeting: 5 Big Ideas
- Joe Kennerson
- 1 day ago
- 4 min read
DCG was recently retained by a new Asset/Liability Management consulting client. The institution was seeking more from ALCO: challenging insights, independence, and the opportunity to ask, “what are we missing?”
During the onboarding, I discovered that their previous ALCO meetings ran for 60 minutes. They told me that their agenda was a “check-the-box” process in which they raced through the interest rate risk (IRR) analysis, checked for policy violations, reported on loan and deposit pricing levels, and reviewed the esoteric stress tests.
They always closed with a rhetorical “Any questions?”, which was really a surrogate for “We finally got through another quarterly ALCO meeting.”
This is not unusual. ALCO meetings have a long list of items to cover. Finding excess time to talk about what to do next is a struggle. This is why ALCO meetings have earned that check-the-box reputation over the years.
I asked if we could stretch the ALCO meetings to 90 minutes.
“Good luck keeping everyone awake,” quipped the CFO.
He had a point. When reviewing IRR alone, financial institutions run shocks, ramps, twists, EVE/NEV, and stress tests. After twenty-five scenarios reviewed, the confusion typically sets in while ALCO members search for their last drop of coffee to stay awake.
The most common quote we hear from new ALM consulting clients is, "We are really in check-the-box mode at ALCO."
We had our first 90-minute ALCO meeting, which culminated in two critical strategic action items. The first was an on-balance sheet hedge to protect the client against their worst-case earnings scenario of a “hard landing” (or rates down aggressively). The second was a two-pronged data-driven deposit strategy: phase one was to accelerate cost savings on CD rollovers by repricing their CD curve, and phase two was to introduce a new Premium Savings product, carefully structured through data analytics with precise tiered pricing that promoted growth while protecting cannibalization.
The client responded later that day, “Feedback from ALCO was great. Nice job bringing the data/analysis to life and answering our So What question.”
So how do we take a sleepy meeting like ALCO that can be Dreadful, and transform it into a standing-room-only and engaging meeting?
It’s certainly not easy, but here is the first of five big ideas that DCG has developed over 40+ years of experience to turn ALCO into a productive, and dare I say, fun, meeting:
Big Idea #1: Focus on the Story
In college, I wrote a popular weekly sports column called Cup of Joe. It really ended up being 20% about sports and 80% attempt of entertainment. What I learned is that reporting about a topic is one thing. Telling a story is another – and it was through the story that the readers could engage with the topic. That’s DCG’s approach to ALCO. How can we strive to be 20% position assessment and 80% strategy discussion?
Telling a story at ALCO can bridge the gap from standard ALCO review to strategy development. Take an example of a recent ALCO discussion for a $1B bank client that was forecasting an unusually large funding gap. One of the main goals for that ALCO meeting was to decide on the next quarter’s deposit product initiatives. To get there, the group built a narrative that incorporated data analytics, recent industry trends and insights, liquidity philosophy, wholesale comfort levels, and IRR sensitivity. It was only through this larger picture discussion that their road ahead became clear, and they could select tactics based on data and not on gut instinct.
Here are three steps to get started on being a better storyteller at ALCO.
Step 1: Separate what is required to report on vs what matters most. Let’s use the example of running 25+ scenarios in the ALCO packet. Of those, what are the 4-5 scenarios that matter most for your institution? What causes the most pain? Why?
Step 2: Condense the deck. ALCO reports are voluminous. It’s tough to find one under 100 pages. But if you had no restrictions (meaning, you could show only the most important points and leave out the rest), how would you present the most effective ALCO meeting? Start there and look to condense the ALCO presentation to about 30 slides.
Step 3: Promote dialogue. The reason why meetings go long should be less to do with heavy content and more to do with healthy dialogues. You need to engage with retail and marketing on liquidity discussions that relate to the marginal cost of funds on deposit products. You need to engage with lending on loan spreads and prepayment structures and their impact on IRR sensitivity. Elicit feedback from the broader team by inserting sections of your ALCO presentation to purposely draw feedback. And remember that a little awkward silence can be healthy.
Stay tuned for the next installment of The Dreaded ALCO Meeting: Five Big Ideas, where I’ll cover the next two Big Ideas to transform ALCO: What Are the Three Things? and Separate Personal Bias from Balance Sheet Bias.
In the meantime, if you’d like more discussion of this and the other ALCO Big Ideas, I invite you to join us for The Dreaded ALCO Meeting webinar on April 30th. Until then, we’d welcome hearing from you if you’d like to talk about transforming your own ALCO into a standing-room-only meeting.
ABOUT THE AUTHOR
Joe Kennerson is a Managing Director at Darling Consulting Group. In this capacity, he works directly with financial institutions by providing solutions for their asset/liability management process in the areas of interest rate risk, liquidity risk management, ALM modeling, regulatory compliance, and executive-level education. He is a frequent speaker and author and directly advises clients in all aspects of ALM.
Contact Joe Kennerson at jkennerson@darlingconsulting.com or 978-499-8150 to work collectively to transform ALCO into a profit center.
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