ALCO Metrics and Decision Framework for Balance Sheet Management

A Guide for Risk and Treasury

Asset Liability Committee (ALCO) processes sit at the center of balance sheet management in banking, bringing together treasury, risk, finance, and business perspectives to support decisions on liquidity, funding, interest rate risk, and profitability. Through ALCO, banks assess how the balance sheet is evolving, how risk exposures are changing, and which actions may be required to maintain alignment with strategy, risk appetite, and market conditions.

At the core of this process is a consistent framework of ALCO metrics used to monitor and interpret the main drivers of balance sheet performance. These typically include metrics related to IRRBB, Net Interest Income (NII), Economic Value Sensitivity (EVE), liquidity risk, funding structure, regulatory ratios such as LCR and NSFR, as well as portfolio positioning and internal transfer pricing.

While these metrics are widely used, their value comes from how they are interpreted together. ALCO is not built around isolated indicators, but around the interaction among liquidity, funding, interest rate risk, profitability, and balance sheet strategy. Understanding these relationships is central to effective balance sheet management.

This guide provides a structured view of the ALCO metrics framework and how it is applied in practice. It covers the core components of the standard ALCO package, how key risk and treasury metrics are analyzed, and how they support decision-making under both normal and stressed market conditions.

Key Metrics and Decision Framework for ALCO: A Guide for Risk and Treasury

How ALCO Metrics Support Decisions in Financial Institutions

Beyond explaining the metrics themselves, this guide focuses on how they support decisions. It explores how balance sheet evolution is assessed through production, pricing, and volumes; how IRRBB metrics help evaluate exposure under different rate scenarios; how liquidity and funding metrics support resilience and funding planning; and how portfolio and FTP metrics contribute to positioning decisions.

It also addresses how scenario analysis is used when market conditions change and how these metrics support the evaluation of management actions across pricing, hedging, funding, and portfolio strategy.

For risk and treasury teams, the priority is to organize metrics within a consistent decision framework that supports balance sheet management. This guide is designed as a practical reference for that purpose, bringing together the key metrics used in ALCO and explaining how they support the understanding and effective management of the balance sheet. 

Key Areas Covered

  • Core ALCO metrics framework:
    How key metrics across IRRBB, liquidity, funding, and portfolio management support the understanding of balance sheet positioning.
  • Scenario analysis under changing conditions:
    How ALCO extends beyond standard monitoring to assess risks, scenarios, and management actions under uncertainty.
  • Balance sheet management and decision support:
    How metrics support decisions across pricing, hedging, funding, and overall balance sheet management.

What You’ll Find Inside

  • A structured view of the ALCO metrics framework
  • How the balance sheet evolution is assessed through production, pricing, and volumes
  • Key IRRBB metrics and their role in measuring risk and exposure
  • Liquidity and funding metrics, including LCR, NSFR, and MREL
  • The role of the ALCO portfolio and internal transfer pricing (TTII / FTP)
  • How scenario analysis is used under changing market conditions
  • The main management levers available to adjust the balance sheet

Why it Matters

ALCO decisions rely on the ability to interpret multiple metrics together and understand how they interact across the balance sheet. This requires consistent information, clear structure, and the ability to assess changes quickly when conditions evolve.

The guide provides a practical reference for risk and treasury teams looking to strengthen their ALCO framework and improve how metrics support balance sheet management.

Download the guide here

Who Should Read This Guide

This guide is designed for professionals involved in balance sheet management and ALCO decision-making, including:

  Treasury teams involved in funding, liquidity, and balance sheet positioning

   Risk professionals focused on IRRBB, liquidity risk, and risk appetite

   Finance and ALM teams are working on forecasting and balance sheet planning

   ALCO members and senior leaders involved in strategic decisions

   Banking professionals seeking a stronger understanding of ALCO metrics and frameworks 

 It is also relevant for professionals, researchers, and enthusiasts interested in asset liability management, treasury, and banking risk, who want a practical view of how ALCO metrics are used in real decision-making.  

The Authors' Perspectives

 

Miguel Ángel Penabella

“The value of ALCO metrics lies in how they are interpreted together as a decision framework. Used in combination, they provide a coherent view of liquidity, funding, interest rate risk, and profitability, supporting informed balance sheet decisions under changing conditions.”

Miguel Ángel Penabella

Strategic Advisor at Mirai RiskTech
Ignacio Campillo

“Effective ALCO depends on connecting key risk and balance sheet metrics through a unified analytical view that supports cross-metric analysis, scenario assessment, and management actions, enabling more timely and consistent decisions.”

Ignacio Campillo

Head of Professional Services at Mirai RiskTech
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