C. Liquidity Risk management

15. In respect of BBR Rule 9.3, Liquidity Risk tolerance of a Bank defines the level of Liquidity Risk that the Bank is willing to assume. A Bank’s risk management strategy usually refers to risk tolerance although risk appetite may also be used. The two terms are used interchangeably to describe both the absolute risks a Bank is open to take (by some called risk appetite) and the actual limits within its risk appetite that a Bank pursues (by some called risk tolerance).

16. In order to implement and maintain a comprehensive Liquidity Risk management framework to comply with the requirements imposed by BBR Rules 9.1 & 9.2, such a framework implemented by a Bank is expected to include:

(a) a statement of the Bank’s Liquidity Risk tolerance, approved by the Bank’s governing body;

(b) a statement of the Bank’s Liquidity Risk management strategy and policy, approved by the governing body;

(c) a statement of the Bank’s operating standards (in the form of policies, procedures and controls) for identifying, measuring, monitoring and controlling its liquidity risk in accordance with its Liquidity risk tolerance;

(d) a statement of the Bank’s funding strategy, approved by the governing body; and

(e) a contingency funding plan.

17. The framework must clearly set out the Bank’s organisational structure as it relates to Liquidity Risk management, and must define the responsibilities and roles of senior management involved in managing Liquidity Risk. The framework must be formulated to ensure that the Bank maintains sufficient liquidity to withstand a range of liquidity stress events (whether specific to the Bank, market-wide, or a combination of the two), including the loss or impairment of both unsecured and secured funding sources. The framework must be well integrated into the Bank’s overall risk management process.

18. The Liquidity Risk management framework must be subject to ongoing effective and comprehensive independent review. In most cases, the independent reviews could be facilitated by the Bank’s internal audit function but may require the engagement of independent experts outside that function. A Bank’s Liquidity Risk management oversight function must be operationally independent. It must be staffed with personnel who have the skills and authority to challenge the Bank’s treasury and other liquidity management functions.

19. The Bank must have adequate policies, procedures and controls to ensure that the Bank’s governing body and senior management are informed immediately of new and emerging liquidity concerns. Such concerns could include:

(a) increasing funding costs or concentrations

(b) increases in funding requirements

(d) material or persistent breaches of limits

(e) significant decline in the Bank’s holdings of unencumbered liquid assets

(f) changes in market conditions that could signal future difficulties.

20. The Bank’s senior management must be satisfied that all of the Bank’s business units whose activities affect the Bank’s liquidity:

(a) are fully aware of the Bank’s Liquidity Risk management strategy; and

(b) operate in accordance with the Bank’s approved policies, procedures, limits and controls.

21. If a Bank delegates its day-to-day Liquidity Risk management to another member of its group, in accordance with BBR Rule 9.3, ultimate responsibility for the Liquidity Risk management function and the responsibility for its effectiveness will remain with the Bank’s Governing Body.

Identifying Liquidity Risk

22. A Bank must fulfill the requirements in this Section, in order to comply with the provisions in BBR Rule 9.1, in relation to identification of Liquidity Risk. In this regard, a Bank must:

(a) assess the repayment profiles of its assets under both normal and stressed market conditions resulting from either systemic stress or idiosyncratic stress.

(b) assess the reliability of committed facilities under stressed conditions.

(d) consider how its off-balance sheet activities affect its cash flows and Liquidity Risk profile under both normal and stressed conditions.

23. If a Bank has significant, unhedged liquidity mismatches in particular currencies, it must assess:

(a) the volatilities of the exchange rates of the mismatched currencies;

(b) likely access to the foreign exchange markets in normal and stressed conditions; and

24. As part of the assessment of the repayment profiles of its assets as referred in 1 (a) above, a Bank should identify significant concentrations within its asset portfolio.

25. In order to assess the potential liability concentrations referred in 1 (c ) above, a Bank should consider factors including, but not limited to:

(a) the term structure of its liabilities;

(b) the credit-sensitivity of its liabilities;

(d) concentrations among its liability providers or related Groups of liability providers;

(e) reliance on particular instruments or products;

(f) the geographical location of liability providers; and

(g) reliance on intra-Group funding.

26. A Bank is also be expected to consider the amount of funding required by:

(a) commitments given;

(b) standby facilities given;

(d) proprietary derivatives positions; and

(e) liquidity facilities given for securitisation transactions.

Measuring and monitoring Liquidity Risk

27. In order to meet the expectations of the AFSA and meet the Rules in BBR 9.1 regarding measuring and monitoring of Liquidity Risk, a Bank must ensure that its Liquidity Risk measurement systems are:

(a) Capable of measuring the extent of its Liquidity Risk exposure;

(b) Equipped with early warning indicators to support its daily Liquidity Risk management processes;

(d) Capable of measuring the Bank's Exposure to Foreign Currency Liquidity Risk, where appropriate;

(e) Capable of measuring the Bank's intra-day liquidity positions, where appropriate; and

(f) Capable of measuring the Bank's Exposure to PSIA and Islamic Contract Liquidity Risk, where appropriate.

28. A Bank must establish and maintain a system of management reporting which provides relevant, accurate, comprehensive, timely, forward looking and reliable Liquidity Risk reports to relevant functions within the Bank. Early warning indicators for day-to-day Liquidity Risk management should be designed to assist the Bank to identify any negative trends in its liquidity position and to assist its management to assess and respond to mitigate its exposure to those trends.

29. A Bank should actively manage its intraday liquidity positions and risks in order to meet payment and settlement obligations on time under both normal and stressed conditions, thus contributing to the orderly functioning of payment and settlement systems. Management information in respect of Liquidity Risk management should include the following:

(a) a cash-flow or funding gap report;

(b) a funding maturity schedule;

(d) where appropriate, a schedule of Islamic funding sources

(e) a limit monitoring and exception report;

(f) asset quality and trends;

(g) earnings projections; and

(h) the Bank's reputation in the market and the condition of the market itself.

30. Where a Bank is a member of a Group, it should be able to assess the potential impact on it of Liquidity Risk arising in other parts of the Group.

Controlling Liquidity Risk

31. In order to meet the expectations of the AFSA and meet the Rules in BBR 9.1 in relation to Controlling Liquidity Risk, a Bank must ensure that its Liquidity Risk management systems:

(a) enable the Bank's Governing Body and senior management to review compliance with limits set to comply with BBR Rule 9.2 (3) and operating procedures; and

(b) has appropriate approval processes, limits and other mechanisms designed to provide reasonable assurance that the Bank's Liquidity Risk management processes are adhered to.

(d) A Bank must promptly resolve any policy or limit exceptions according to the processes described in its Liquidity Risk policy.

32. A Bank should set limits to control its Liquidity Risk exposure and vulnerabilities. Limits and corresponding escalation procedures should be reviewed regularly. Limits should be relevant to the business in terms of its location, complexity of activity, nature of products, currencies and markets served. If a Bank breaches a Liquidity Risk limit, it should implement a plan to review its exposure and reduce it to a level that is within the limit.

33. A Bank should actively manage its collateral positions, differentiating between encumbered and unencumbered assets. A Bank should monitor the legal entity and physical location where collateral is held and how quickly the collateral may be used.

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