Faculty & Research

The ALCO Challenge: This user-friendly pedagogical simulation is used to discuss Asset and Liability Management, the control of value creation and risk in banking. Participants are grouped into teams, each of which represents the Asset-Liability Committee (ALCO) of  one bank. They take various decisions related to pricing, balance sheet management, and off-balance sheet control.  A unique feature of ALCO Challenge is that it includes advanced control tools that help participants to understand the sources of profitability and risks.  It is compliant  with the Basel II capital regulations. ALCO Challenge operates in English, French, Spanish, Portuguese, and Russian.

Areas: Asset-Liability Management in Banking

Authors: Youssef F. Bissada, Affiliate Professor of Operations Management and Jean Dermine, Professor of Banking and Finance

Minimum time required: A minimum of 24 "contact hours", i.e. a minimum of 2½ days for an intensive "in residence" programme and up to 5 days if basic concepts have to be introduced

Distribution Contact:
Professor Jean Dermine
INSEAD
Tel: (33) (0)1 60.72.42.47

Description

The ALCO Challenge is an educational computer package created to meet the training needs of bank branch managers, corporate bankers, treasurers and strategic planners.

Participants use the simulation in teams, each team forming an Asset-Liability Committee. Through the use of the simulation the participant is presented with an integrated view of the links between the profitability of products, risk, capital adequacy, taxation, and the stock market value of banks.

To help the participants understand the outcome of the decisions they make while facing the ALCO Challenge, several control tools have been built into the simulation: audit reports on product profitability, a maturity bucket, a simulation model and a duration gap report. The ALCO Challenge incorporates the latest financial techniques in profitability and risk management. It is entirely accurate, taking properly into account the effects of taxation and BIS capital regulations.

ALCO runs fully on PCs, and can therefore be used anywhere. The package is exceptionally user-friendly and no previous computer experience or knowledge is required by participants. The programme runs simultaneously in different languages (English, Spanish and French).

Pedagogical Objective

The pedagogical objectives of ALCO are fourfold:

• Value added in financial services : 
  ALCO presents an integrated view of the links between product profitability, risk factors, capital adequacy, taxation and the market value of banks.
• Strategic Pricing :
  The competitive environment in which the simulation takes place leads to an in-depth analysis of market prospects, other teams' strategies and competitive positioning.
• Negotiation :
  The pricing of interest rate swaps and the sale of loans to other banks help develop the negotiation skills of participants.
• Team work :
  The functioning of an Asset-Liability Committee involves the delegation of tasks, consensus, decision making, and negotiation with other teams.