Introduction to Asset Liability Management

ALM is the management of assets and liabilities for the benefit of credit union members. Credit unions act as a financial intermediary, buying money from members (deposits) by paying dividends and selling money to members (loans) by charging interest. They also manage primary risks such as credit risk, interest rate risk, and liquidity risk, alongside other business-related risks like operational, legal, and reputational risks. Board members play a crucial role in setting policies, risk limits, and understanding the credit union's financial health.

Financial statements, like balance sheets and income statements, summarize a credit union's activities. A balance sheet outlines assets (e.g., loans, investments), liabilities (e.g., shares), and net worth (capital). An income statement shows revenue from interest income (loans and investments) minus interest expenses (dividends on shares) and other operational costs. Key ratios help compare financial performance across credit unions. Net interest income is the primary source of earnings, and its level depends on the mix and rates of assets and liabilities.

Several factors influence a credit union's performance. The mix of assets and liabilities (e.g., more loans versus investments) affects interest income. The mix of share types impacts interest expenses. Loan and deposit rates are set by the credit union, affecting interest income and expense. The volume of assets and liabilities also matters, with larger credit unions potentially operating on thinner margins. Net interest income must cover loan loss provisions and operating expenses. Fee income can help offset these costs, and non-operating income/expense can also occur.

ALM is a core and ongoing process for credit unions, involving managing assets and liabilities to meet financial objectives while balancing risk and reward. It requires defining financial objectives (e.g., maximizing earnings for low capital or managing growth for high capital) and understanding risk tolerance. The goals of ALM are to maintain positive earnings, protect and stabilize capital, ensure liquidity to meet member needs, and balance the risks taken.

ALM decisions are influenced by member needs, competitor rates, market interest rates, and the regulatory environment. The formal ALM process starts with an asset liability policy that outlines objectives, responsibilities, risk measurement, and tolerance. ALM models are used to identify and measure interest rate and liquidity risk. Board members are responsible for overseeing the ALM process, approving policies and risk limits, understanding the credit union's risk exposure, and ensuring strong internal controls. Management or an ALM committee develops and implements policies and strategies, and monitors and reports risk to the board.