BAS Presentations - March 2023

APPENDIX A: Critical Elements of Sound Liquidity Risk Management (based on FIL 13-2010) Effective corporate governance o Board of directors should oversee the establishment and approval of liquidity strategies, policies, and procedures, and review them at least annually. o Senior management is responsible for ensuring board-approved strategies, policies, and procedures are appropriately executed. o When a bank uses an asset/liability committee to monitor the liquidity position, it should have broad representation across major functions that can influence the liquidity risk profile (e.g. lending, investments, wholesale and retail funding). Appropriate strategies, policies, procedures, and risk limits o Policies should clearly articulate appropriate risk tolerances and contain provisions for documenting and periodically reviewing assumptions used in liquidity projections. o In normal conditions, senior management should receive liquidity risk reports at least monthly, while the board of directors should receive liquidity risk reports at least quarterly. Comprehensive risk measurement and monitoring systems o Management reporting may include cash flow projections, critical assumptions used in these projections, funding and asset concentrations, key early warning or risk indicators, funding availability, contingent liability exposures (e.g. unfunded loan commitments), and collateral usage. o Should include robust methods for comprehensively projecting cash flows arising from assets, liabilities, and off-balance sheet items over an appropriate set of time horizons. o Should also include stress tests for a variety of bank-specific and market-wide events across multiple time horizons. The magnitude and frequency should be commensurate with the complexity and risk profile of the bank. Results should play a key role in shaping contingency planning. o Note – bank management should ensure cash flow and stress-testing assumptions are reasonable, adequately documented, and periodically reviewed. Active management of intraday liquidity o Important component for banks engaged in significant payment, settlement, and clearing activities . Appropriately diverse mix of existing and potential future funding sources o Undue over-reliance on any one source of funding is considered an unsafe and unsound practice. o Management should identify and monitor the main factors that affect the ability to raise funds. o Consistent with a bank’s risk profile, management should ensure market access is being actively managed, monitored, and tested . Adequate levels of highly liquid assets o Target amounts of highly liquid assets should be supported by estimates of liquidity needs performed under a bank’s stress testing. Comprehensive contingency funding plans o All banks, regardless of size and complexity, should have a formal CFP that clearly sets out the strategies for addressing liquidity shortfalls in emergency situations. Sufficient internal controls and internal audit processes o Management should ensure an independent party regularly reviews and evaluates the various components of a bank’s liquidity risk management process. Smaller, less complex banks may achieve independence by assigning this responsibility to the audit function or other qualified individuals independent of the risk management process.