The Ingredients for a Strong ALM Program

The Ingredients for a Strong ALM Program

When’s the last time you baked a cake for a special occasion? Or tried your hand at a new recipe for dinner? Even if you’re a pro in the kitchen, chances are you still probably utilized some of the basic ingredients, right? Otherwise, you might run the risk of baking a cake that doesn’t taste very good or having to come up with an alternative plan for dinner.

Now, you might be wondering: what does baking a cake or cooking dinner have in common with asset liability management (ALM)?

At first glance these topics may seem vastly different, but, in fact, they’re connected because they all require you to know what goes into it to make it “good.” For baking, you need to know the main ingredients like flour, milk and sugar, as well as how much of each ingredient to use. For cooking, you may need staple ingredients like salt, pepper and butter. And for a strong ALM program, you need:

  • A knowledgeable and active ALCO committee
  • Comprehensive ALM and Funds Management policies
  • Quantitative measurements of interest rate risk
  • Education for staff and board members

It probably makes sense why it’s important to know what main ingredients to include in your baking or cooking escapades; you want it to taste good, right?

The same goes for an ALM program. If you want it to be “good,” or strong, you need to know what should be included. Because after all, a strong ALM program will help your credit union acquire a clear view of risk tolerance levels and understand how to incorporate them into business strategies.

But it’s not over quite yet. Now that we know what main “ingredients” need to be included in a strong ALM program, we can discuss “unique touches.” Too often, credit unions don’t review or update the assumptions in their model. That’s kind of like deciding to cut out dairy but never updating your macaroni and cheese recipe with dairy-free alternatives. Like people, credit unions change, which means your assumptions will change over time and need to be updated.

Your credit union’s ALM program is yours, so you need to “own” your assumptions because in order for ALCO and management to properly analyze and fully understand the risk, you must know the fundamental elements that are driving your risk measurements. General assumptions include non-maturity share decay rates, prepayments, current offering rates and price sensitivity betas. But your credit union needs to work with your ALM processing vendor to establish model assumptions.

From the staples to the unique touches, once you build a sound ALM program and put it to work, you’ll be able to try your hand at other things, like assessing opportunities that will help shape your credit union’s future.

What are you waiting for? Get to baking, cooking and building your ALM program today. And if you need help from an expert, Vizo Financial Corporate Credit Union offers an array of ALM services, including modeling and validations. For additional information on our ALM services, please contact our ALM Department at!

Melissa Scott serves as Vizo Financial’s vice president of ALM services. In this role, she is responsible for managing and providing ALM reporting, modeling, validation and consulting services to credit unions. She is also responsible for providing ongoing training, support and education for ALM users, management and their board of directors. She also holds the designation of certified public accountant (CPA) and is a member of the North Carolina Association of Certified Public Accountants.