Leading ALM & IRR Management: Best Practices for Financial Institutions

12/15/2025 - By Jake Thurman

In an environment marked by uncertainty, shifting rate cycles, and increasingly complex balance sheets, financial institution leaders face a familiar but ever-evolving challenge: ensuring the accuracy, relevance, and resiliency of their asset/liability management (ALM) and interest rate risk (IRR) models.

Today’s leaders can no longer rely on model outputs alone. Instead, they must cultivate a disciplined, transparent, and forward-leaning approach to model governance, one rooted in strong policy, realistic assumptions, and ongoing communication between management, ALCO, and the board.

Below are key themes and leadership considerations for strengthening ALM and IRR oversight in the current rate environment.

Model Integrity Starts With Curiosity and Challenge

Even the most sophisticated ALM models are only as good as the data and assumptions fed into them. The familiar phrase “garbage in, garbage out” still applies.

Leaders should foster an environment where teams:

  • Question the assumptions driving model behavior
  • Regularly revisit whether those assumptions reflect current market realities
  • Understand results beyond the executive summary
  • View model reviews as strategic exercises, not technical hurdles

Models are not “right” or “wrong”, they are tools. Leadership engagement is what gives those tools meaning and direction.

Strong Policy Is the First Line of Defense Against Tunnel Vision

A well-designed and frequently updated ALM/IRR policy is foundational to effective governance. It should operate as a guidebook, not a checkbox.

Key policy components that help prevent blind spots include:

  • Clearly defined limits for earnings and capital at risk
  • Documented responses for out-of-policy conditions
  • Requirements for assumption testing and back-testing
  • Annual (or more frequent) policy reviews

When treated as a living document, policy helps maintain discipline, clarity, and consistency, even in volatile environments.

Detailed Minutes Preserve Context, Rationale, and Accountability

Robust documentation is one of the most overlooked elements of strong ALCO governance. High-quality minutes create continuity across leadership transitions, regulatory cycles, and shifting priorities.

Effective minutes should capture:

  • Out-of-policy conditions and the reasoning behind them
  • Performance trends discussed during meetings
  • Model assumptions reviewed or challenged
  • Action plans and responsible parties
  • Alternative scenarios and their potential impacts

This level of documentation strengthens transparency and institutional memory.

Assumptions Must Reflect Reality

As interest rates shift, leaders should look backward as well as forward. Reviewing performance during previous low-rate periods (such as late 2021–early 2022) provides clear guardrails for today’s modeling decisions.

Critical assumption considerations include:

  • Deposit floors that reflect actual historical behavior, not theoretical minimums
  • Realistic deposit betas as rates fall
  • The potential behavior of time deposits during different rate shocks
  • The impact of unwinding surge deposits accumulated during COVID

Assumptions grounded in reality help prevent misleading results and protect strategic decision-making.

Sensitivity Testing Is Essential to Strategic Planning

One of the most valuable and frequently overlooked components of ALM governance is consistent, structured sensitivity testing.

Best practice is quarterly testing; the minimum is annually. Sensitivity analysis allows leaders to understand:

  • How changes in deposit betas affect earnings and capital
  • The institution’s vulnerability to deposit runoff
  • The impact of different rate shocks on performance
  • Weak points in balance sheet structure before they become issues

These insights equip teams to anticipate challenges rather than react to them.

A Leadership Imperative

Interest rate risk management is more than a regulatory requirement, it is a strategic discipline. Effective leaders set the tone by:

  • Encouraging open dialogue around assumptions and results
  • Supporting policies that reflect current realities
  • Prioritizing documentation and governance
  • Engaging deeply with the modeling process

When leadership embraces these principles, ALM becomes a strategic advantage, empowering institutions to navigate uncertainty with clarity, confidence, and resilience.

Our Financial Institutions team is here to help. Whether you’re refining your ALM assumptions, strengthening IRR governance, or preparing for your next exam, we’re ready to support you. Contact our team to start the conversation.

About the Author | Jake Thurman

Jake is a senior consultant in the Financial Institution Advisory Group with over 12 years of experience working with financial institutions. He began his career with an investment bank specializing in investment portfolio management for community financial institutions nationwide. Jake’s primary areas of concentration include asset & liability management, interest rate risk modeling, and liquidity management.

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