ALCO GOVERNANCE ESSENTIALS: BUILDING AN EFFECTIVE COMMITTEE STRUCTURE

But Todd, before we jump into that most of our listeners have probably know what your background is, but we might have some first time listeners if you could give a little bit of your background at NCUA and what you did there before retiring a few years ago and and switching teams like I did.

And then the last third of my career from 2009 and on, I had a last year at West core with you when they were in conservatorship. But then I spent the last decade of my career as a director of special actions, supervising problem case officers. Dealing with troubled credit unions, and I also supervised regional capital market specialist and regional lending specialist in that last 3rd as well.

They're in charge of managing capital and credit quality as well. It's very difficult to manage liquidity and interest rate risk. If you don't also have your fingers in that pie of managing credit risk and capital as well, before we talk about ALCO reporting, maybe let's just go back and talk about ALCO in general, because these are the communities that manage it. Most credit unions and very large organizations. What you'll see is committees will have charters in smaller organization.

These committee functions will be laid out within policies and ALM policies and liquidity policy. A financial management policy,

We'll use the term ALCO today, even though a lot of parties name this committee different things, in a charter, they should lay out the purpose and role of the committee. What is the committee's purpose? Are they going to oversee that interest rate risk liquidity risk? They're going to be. In charge of capital adequacy, they're going to have credit risk in it or not. I do think all those pieces should be in it, but that's not always the case.

Some committees keep credit risk and other parts of the risk management in other committees. Either way, they should lay out purpose and roles of the committee. They should specify who's on these committees. Outgo committees are generally drawn from a wide range of staff. Usually you have a CEO, some lending people, some member service people, occasionally a marketing person on there as a non voting. Over the years, what really.

Gets to become a challenge for board is, do you put board members on these committees or not, and smaller credit, especially you'll see examiners recommend that board members be on these committees in larger credit unions. It's very difficult to put an unpaid board member on a committee that has a very significant hour and time obligation.

So what in a lot of organizations now are mid sized and has larger credeins is you end up seeing a staff ALCO that handles those everyday tactics and strategy adjustments. And it's not uncommon to see a board risk management or a board ALCO that's separate, that meets less frequently. Like I said, I think it's very challenging to recruit. Put board members on something like an ALCO, because there's a lot of daily work and board members are not really paid for that daily work.

Your committee charter should outline your meetings. How frequently do you expect them to meet? Under what conditions? Basic responsibilities of the committee, what are they going to be responsible for in terms of different risk categories? The committee's authority, what can they or not do? Are they responsible for pricing? Do they get to change investment strategies? Can they change lending strategies in the midst of a business plan as conditions change?

You should lay out just exactly what kind of authority they have and responsibilities. Also I would think for larger credit unions you should lay out what can that committee re delegate to someone else. If you give ALCO, pricing authority, can they do that? Redelegate that down to a smaller subgroup and pricing becomes a pretty important function of communities. Your charters policy statement should specify reporting and we'll talk about reports in a couple of minutes.

And your committee charter should lay out what kind of performance metrics. Revaluation review and evaluation are going to be doing how well does this committee operate? How often do we have to relook at it? And committee charter should probably also lay out what kind of documentation that committee is responsible for and we'll talk about that in a little bit as well under reporting.

There were some issues that, that might have triggered there to be more board involvement in some way, but I was a little surprised to see that NCOA was actually saying these are the types of folks that should be on the committee. And then on the other side, we've had some conversations where more and more as at the tail end of our time at NCOA, and even more since we left the position of chief risk officer is more prevalent in credit unions.

And we've seen some situations where chief risk officers. Have been on the committee and have not been on the committee. And also where where N2A was trying to truncate what responsibilities that chief risk officer had as it related to the charter. I guess in general, I would say as you're building. Out this charter and who's on it and what the responsibilities are. You might sometimes find that and see you ask questions relative to that.

In the end, there's best practices, but there's really what makes sense for you. And there's not a lot. There's not a regulation that ties to who should be on these committees, et cetera. Anything based on what I just said there that you either want to correct or maybe opine on.

If you have a board member, he's a CPA, he's been a chief financial officer, chief risk officer somewhere, and has time available and wants to be on the committee, absolutely make room for them. If that fits in with the whole culture of the organization the chief risk officer one, I thought that one was really interesting.

When one of our clients was told to take their chief risk officer off of the Elko, because I thought that was, allowing a chief risk officer to be basically making decisions or making decisions on risk. But as part of that, I did some research and even in the very, very super large banks, Elko. Because they're not making individual risk decisions, like buying an investment or what have you. They're part of the strategy team. Putting them there actually probably helps their function.

It probably helps the Alco when they've got responsibilities over here with compliance and other issues. And good risk managers, but you know who to put on committees and not just Elko, but any committee, a loan committee I. T. steering committee or what have you, those are individual decisions that boards and executive management make and you structure those based on the knowledge skills of your people and the needs of the organization.

On any given place, maybe that chief risk officer should be on the alcohol at another place. Maybe the chief risk officer shouldn't be because the way you define that individual roles and responsibilities, it's more of a legal compliance CRM, and they don't have the knowledge, skills and ability to contribute, so I think you leave those decisions to individual credit unions. This is part of board governance and how you set up your risk management culture.

And like I said, you put people on committees because it meets the credit union's needs, and they have the knowledge, skills, and abilities to be there, or you put them there because you want to improve their knowledge, skills, and abilities as you prepare them for other roles in the organization.