Module: | MODULE D: BALANCE SHEET MANAGEMENT
Q514: Consider the following statements regarding the structural composition and regulatory mandates of the Asset Liability Management Committee:
1. The Asset Liability Management Committee functions as the supreme execution body within a bank, responsible for strategically directing all balance sheet management and ALM policies.
2. The committee is mandatorily headed by the Chief Executive Officer or Managing Director, and includes senior participation from the Treasury, Risk Management, and Credit departments.
3. ALCO possesses the ultimate independent authority to bypass the bank's Board of Directors when establishing global risk appetite limits during severe systemic liquidity crises.
4. Core responsibilities of the committee include determining benchmark base interest rates for advances, pricing term deposits, and reviewing structural liquidity gap reports.
2. The committee is mandatorily headed by the Chief Executive Officer or Managing Director, and includes senior participation from the Treasury, Risk Management, and Credit departments.
3. ALCO possesses the ultimate independent authority to bypass the bank's Board of Directors when establishing global risk appetite limits during severe systemic liquidity crises.
4. Core responsibilities of the committee include determining benchmark base interest rates for advances, pricing term deposits, and reviewing structural liquidity gap reports.
✅ Correct Answer: A
The Asset Liability Management Committee (ALCO) is the highest operational decision-making body for balance sheet risk within a commercial bank.
It translates the Board's risk appetite into actionable business strategies, governing product pricing, funding mix, and liquidity reserves.
A: This is the correct combination.
Statements 1, 2, and 4 accurately outline the strategic role, mandatory composition, and core pricing responsibilities of the ALCO.
B: This option is incorrect because it includes Statement 3, which falsely elevates ALCO's authority above the sovereign risk governance of the Board of Directors.
C: This option is incorrect because it incorporates the false Statement 3 regarding ALCO's independent policy authority.
D: This option is incorrect because Statement 3 is fundamentally false.
While ALCO handles high-level execution and strategic direction, it operates strictly and subordinately under the broader risk management policies, capital limits, and risk appetite frameworks approved by the bank's Board of Directors.
It cannot bypass the Board.
Breakdown of Statements:
Statement 1 is legally accurate.
ALCO is the supreme executive committee responsible for steering the balance sheet, actively deciding whether to expand or contract asset books based on market forecasts.
Statement 2 is structurally correct.
RBI guidelines mandate that the CEO/MD chairs the ALCO to ensure top-level accountability, supported by cross-functional heads (Treasury, Credit, IT, Risk) to prevent siloed decision-making.
Statement 3 is conceptually false.
Corporate governance dictates that the Board of Directors always holds the ultimate authority for establishing the bank's global risk appetite.
ALCO strictly executes within those Board-approved limits.
Statement 4 is factually correct.
ALCO's most visible market impact is its power to alter the bank's internal pricing engine, dictating the interest rates offered on public deposits and the benchmark rates charged on retail and corporate advances.
It translates the Board's risk appetite into actionable business strategies, governing product pricing, funding mix, and liquidity reserves.
A: This is the correct combination.
Statements 1, 2, and 4 accurately outline the strategic role, mandatory composition, and core pricing responsibilities of the ALCO.
B: This option is incorrect because it includes Statement 3, which falsely elevates ALCO's authority above the sovereign risk governance of the Board of Directors.
C: This option is incorrect because it incorporates the false Statement 3 regarding ALCO's independent policy authority.
D: This option is incorrect because Statement 3 is fundamentally false.
While ALCO handles high-level execution and strategic direction, it operates strictly and subordinately under the broader risk management policies, capital limits, and risk appetite frameworks approved by the bank's Board of Directors.
It cannot bypass the Board.
Breakdown of Statements:
Statement 1 is legally accurate.
ALCO is the supreme executive committee responsible for steering the balance sheet, actively deciding whether to expand or contract asset books based on market forecasts.
Statement 2 is structurally correct.
RBI guidelines mandate that the CEO/MD chairs the ALCO to ensure top-level accountability, supported by cross-functional heads (Treasury, Credit, IT, Risk) to prevent siloed decision-making.
Statement 3 is conceptually false.
Corporate governance dictates that the Board of Directors always holds the ultimate authority for establishing the bank's global risk appetite.
ALCO strictly executes within those Board-approved limits.
Statement 4 is factually correct.
ALCO's most visible market impact is its power to alter the bank's internal pricing engine, dictating the interest rates offered on public deposits and the benchmark rates charged on retail and corporate advances.