Bank Holding Company — Asset/Liability Management Policy
Internal Audit Checklist
[Institution’s name]
[Department(s) under review]
[Head(s) of department under review]
A. ___ General Goal
1.
Was it determined that the current policy
states the goal of the asset/liability policy
is to better manage and consolidate the
organization’s balance and off-balance
sheet activities to maximize consolidated
earnings while operating at an acceptable
level of risk?
2.
To better achieve the aforementioned
policy, does the policy contain statements
which aim to achieve the following:
a.
Focus attention on volume, mix,
repricing opportunities, products
pricing, and maturities of assets and
liabilities?
b.
Control the degree of interest rate
gap between assets and liabilities?
c.
Control exposure to change in
interest rates to provide an optimal
and stable net interest margin?
d.
Provide the basis for an integrated
balance sheet management?
e.
Ensure the safety and soundness of
the deposits of each of the bank
holding company’s subsidiary
banks?
B. ___ Specific Goals
1.
Was the current policy reviewed to
determine that specific goals are stated
including but not limited to the
following:
Yes
No
Perf.
by &
Date
W/P
Ref.
Comments
a.
Consistently achieve a consolidated
pretax return on average assets about
1.25 percent?
b.
Maintain a cumulative gap position
within 10 percent for calculated time
frames of overnight, six months, one
year, and two years?
c.
Maintain a consolidated ratio of net
interest income to average assets of 2
percent?
d.
Maintain a consolidated leverage
ratio of 4 percent or more?
e.
Maintain a consolidated ratio of tier
1 capital to risk-weighted assets of 4
percent and a consolidated total
capital to risk-weighted assets ratio
of 8 percent?
C. ___ Authority
1.
Has the board reviewed the current policy
and delegated day-today operating
authority to senior executive officers at
both the holding company and bank levels?
2.
At the holding company level does policy
require the formal management
asset/liability committee meet no less
than monthly?
D. ___ Risk Management
1.
Has the board reviewed their policy
concerning the various types of risk and
the correlating management techniques
respective to each risk?
2.
With regards to the aforementioned risk,
have the following types of risk and the
appropriate means in which to handle a
situation within each type of risk been
reviewed, should it arise?
a.
Credit risk. Impacting earnings or
capital due to an obligor’s failure to
meet the terms of a loan and or
investment, or otherwise failing to
perform as agreed. Credit risk can
occur at any time an institution relies
on another party, issuer, or
borrower’s performance.
b.
Interest rate risk. Addressing the
potential adverse impact to the
organization’s capital or earnings
arising from movement in interest
rates. Interest rate risk evaluation
must take into consideration the
impact of complex hedging strategies
or products that become illiquid;
potential impact on loans or
investments due to earnings reduction
of the actual investments per changes
in interest rates; or ability to sell
assets in the portfolio due to
significant changes in interest rates.
c.
Liquidity risk. Addressing the risk to
earnings or capital arising from a
bank holding company or individual
bank’s inability to meet its
obligations when they come due
without incurring unacceptable
losses. Liquidity risk includes also the
inability to manage unplanned
decreases or changes in funding
sources, or failure to recognize or
address changes in market conditions
that affect the ability to liquidate
assets quickly and with minimal loss
in value.
d.
Price risk. Measuring and
supervising the risks inherent with
market-making, dealing, and
position-taking activities in interest
rates, foreign exchange, equity and
commodities markets. Price risk
represents a risk to earnings or
capital arising from changes in the
value of portfolios of financial
instruments.
e.
Compliance risk. Maintaining legal
compliance with various regulations
as well as the organizations ALCO
policies.
f.
Reputation risk. Developing and
retaining marketplace confidence in
handling customers’ financial
transactions in an appropriate
manner as well as protecting the
safety and soundness of the
consolidated institution.
E. ___ Definitions
1.
Was it determined that the bank’s current
policy ensures that terms and acronyms
are consistent with those recognized and
used in the financial services industry?
F. ___ Asset/Liability Management
Committee
1.
Was the current policy reviewed to
ensure there is a asset/liability
management committee (ALCO) to
coordinate the asset/liability management
of each subsidiaries into a unified
asset/liability management function and
to communicate board policies regarding
limits and concerts?
2.
Does current policy state the purpose of
the ALCO is to report the status of the
holding company’s funds management to
the board of directors through monthly
reports and discussions at monthly
meetings?
3.
Was it determined that the current policy
mandates that each subsidiary bank
maintain its own ALCO while the
corporate ALCO ensures the operations
of each subsidiary bank supports the
overall goals of the organization?
4.
Is it stated within current policy that each
subsidiary ALCO provide the corporate
ALCO with the following information on
a monthly basis:
a.
Financial statements and capital
position?
b.
Statements of historical and
projected sources and uses of funds?
c.
Local business and economic
conditions?
d.
Anticipated changes in the volume
and mix of loans, investments, and
sources of funds?
e.
Current interest rates offered on
deposits?
f.
Current interest rates paid on
investments?
g.
Comparison of key bank
performance ratios of the past four
quarters with those of peer banks?
h.
Maturity distributions and rate
sensitivities of assets and liabilities?
G. ___ Parent Company Funding
1.
Was the standard policy of the bank
holding company reviewed to ensure it
doesn’t engage in any activities that
could impair the safety or stability of
subsidiary banks?
2.
Does the current policy ensure the use of
short-term debt that will only be used to
fund assets that are readily convertible to
cash without undue loss?
3.
Within the current policy does the parent
company maintain enough liquid assets
to cover short-term liabilities?
4.
Is it the standard policy of the parent
company to maintain a fixed charge
coverage ratio of two, that being an
operating income that is twice the level
of its operating expenses?
H. ___ Commercial Papers
1.
Was the standard policy of the bank
holding company not to use commercial
paper to fund long-term assets or
corporate dividends or to pay current
expenses reviewed?
2.
Was it determined that the current policy
ensures purchasers of its commercial
paper understand that they are buying an
uninsured debt obligation of the holding
company organization and that the paper
does not represent an insured deposit of
any of the subsidiary banks?
3.
With regards to the previous question, is
it policy for employees to orally inform
potential customers of the noninsured
status of commercial paper?
4.
Is it stated within current policy that the
bank holding company may not sell
commercial paper in any public area
where retail deposits are accepted,
including any of the subsidiary banks’
lobby areas?
5.
Is the currently practiced policy that an
unaffiliated bank may fully support all
issuances of commercial paper with
backup lines of credit to cover any
unexpected runoff of commercial paper
maturity?
I. ____ Liquidity
1.
Did you review the standard policy to
ensure that the following liquidity
measures are monitored by ALCO on a
consolidated basis:
Measure
Target
a.
Liquidity ratio?
Minimum of
20 percent
b.
Loan-to-deposit
ratio?
70 to 80
percent
c.
Investments to total
assets ratio?
Minimum of
10 percent
d.
Large liability
dependency ratio?
Maximum of
10 percent
J. ____ Rate Sensitivity
1.
Was it determined that it is the standard
policy for the bank holding company to
manage its gap positions to provide a
stable net interest margin?
2.
Is ALCO responsible for evaluating
economic forecasts and their
corresponding effects on BHC’s balance
sheet and pricing strategy in addition to
establishing guidelines for the
consolidated organizations rate
sensitivity as part of standard policy?
3.
Has the board reviewed current policy to
ensure that if ALCO recommends the rate
sensitivity should be modified that
alternative funding strategies have been
recommended by ALCO?
K. ___ Profitability
1.
Was the standard policy reviewed to
ensure the bank holding company work
diligently to maintain a sufficient and
stable net interest and margin through
synchronized management of the holding
company’s rate sensitivity and pricing
mechanisms, as well as through active
management of non-interest expenses?
2.
Is it the current policy, as approved by
the board, to supervise the organization’s
interest rate spread between its yield on
deposits and investments and its cost of
funds will decrease its vulnerability to
interest rate fluctuations?