The Asset and Liability Committee's (ALCO) job is to devise broad strategies for handling a bank’s many competing needs over the long-run and to monitor and manage its interrelated risk exposures on a daily basis. As a consequence, the ALCO is the focal point for coordinating the bank’s many activities to accomplish its operating objectives. To help do this, and to help in its planning for the bank, the ALCO receives a wide variety of reports and analyses that bring together information on the bank’s asset/liability positions, its capital level, its internal plans and current and projected external conditions. Some typical types of information and analyses the ALCO might receive include:

• Information on current and projected national and local economic conditions and the outlook for interest rates.
• Loan and deposit positions and forecasts, including any concentrations in either.
• The current and projected liquidity position for the bank.
• An analysis of the potential effects of interest rate risk on the bank’s income and capital position.

Madison, in her verbal remarks, provided you with information on the state of the economy during late 1994 and expectations for interest rate changes, but provided little else. At a minimum, you would want some sort of summary analysis that described how the note purchase fit into, or was consistent with, the bank’s operating strategy and any risks associated with the purchase.

In addition, Madison's report was incomplete because it didn’t mention the bank’s liquidity position or make any recommendation regarding the bank’s liquidity, leaving this important area of board responsibility uncovered.

When making decisions about asset and liability management, remember the following:

• Potential sources of funds should be balanced against the likely need for funds.
• The interest-rate sensitivity of assets should be balanced against that of liabilities.
• Both of these concerns should be balanced against the bank’s profitability goals.