Asset and liability management: form and function of the committee

Federal Home Loan Bank Board Journal, April, 1984 by William C. Handorf, Michael P. McCarthy

* Association assessment (managing officer) a. current financial/budget variances b. yield sensitivity gaps c. board of director guidelines d. regulatory update

* Competitive assessment (marketing officer) a. association's market analysis (customers, products, promotion) b. local and nonlocal competition (prices, fees, services, market share) c. consequence of above to source and use of funds decisions

* Economic assessment (financial officer) a. fiscal and monetary policy b. level and structure of interest rates c. consequence of above to source (borrowing) and use (investments) of funds and of hedging

* Funds acquisition (savings officer) a. local demographic personal income and taxation trends b. elasticity of savings analysis c. consequence of above to source of funds (deposits)

* Funds distribution (lending officer) a. employment, construction, and industry trends b. elasticity of loan analysis c. consequence of above to use of funds (loans)

* Decision-making (all members) a. cash projections and coordinated investment/financing alternatives b. time phased, individually assigned responsibilities c. responsiveness and impact of decisions to board-directed targets, the competition, and the economy.

One significant advantage of the asset/liability committee's composition and agenda is that the forum forces communication among senior management members. Otherwise, communication is often parallel between the managing officer and each senior manager. Summary

Asset/liability management can trigger a strategic response when problems emerge when planning to obtain or deploy funds. New markets, new products, and new promotions will result as local competition within a regulatory protected environment gives way to nonbank competition. Inflation, high interest rates, technology, and more permissive legislation have altered the operating environment.

Associations must now deploy and acquire funds in a coordinated and realistic manner consistent with liquidity, credit quality, yield stability, and earnings. To achieve this objective, associations should appoint an asset/liability committee composed of senior officers responsible for gathering and using funds. This article has reviewed the pitfalls to avoid when considering the form and function of the committee. Successful committees:

* receive long-term guidance and operating instructions from the board of directors;

* are comprised only of senior management;

* meet regularly;

* require advance preparations and distribution of reports;

* evaluate the consequence of proposed actions;

* deliberate alternatives quantitatively and qualitatively;

* assign action oriented guidelines with deadlines for specific individuals; and

* provide feedback and progress reports to the board of directors.

The exact responsibilities and precise make-up of a committee vary among associations. Asset size, association mission, managerial depth, director concern, financial condition, computer availability, and managing officer commitment also affect the committee's form and function. The evolving environment for financial institutions requires planned responses at the institution level. The asset/liability committee facilitates that planning.