51)A bank should have a reliable management information system designed to provide the board of directors, senior management and other appropriate personnel with timely and forward-looking information on the liquidity position of the bank.
52)The management information system should have the ability to calculate liquidity positions in all of the currencies in which the bank conducts business – both on a subsidiary/branch basis in all jurisdictions in which the bank is active and on an aggregate group basis. It should capture all sources of liquidity risk, including contingent risks and the related triggers and those arising from new activities, and have the ability to deliver more granular and time sensitive information during stress events.
53)To effectively manage and monitor its net funding requirements, a bank should have the ability to calculate liquidity positions on an intraday basis, on a day-to-day basis for the shorter time horizons, and over a series of more distant time periods thereafter. The management information system should be used in day-to-day liquidity risk management to monitor compliance with the bank’s established policies, procedures and limits.
54)To facilitate liquidity risk monitoring, senior management should agree on a set of reporting criteria, specifying the scope, manner and frequency of reporting for various recipients (such as the board, senior management, and asset – liability committee) and the parties responsible for preparing the reports.
55)Reporting of risk measures should be done on a frequent basis (e.g. daily reporting for those responsible for managing liquidity risk, and at each board meeting during normal times, with reporting increasing in times of stress) and should compare current liquidity exposures to established limits to identify any emerging pressures and limit breaches.
A bank must establish a forward-looking funding strategy that provides effective diversification in the sources and tenor of funding.
56)A bank should diversify available funding sources in the short-, medium- and long term. Diversification targets should be part of the medium- to long-term funding plans and is aligned with the budgeting and business planning process.
57)Funding plans should take into account correlations between sources of funds and market conditions. The desired diversification should also include limits by counterparty, secured versus unsecured market funding, instrument type, tenor, securitization vehicle, currency, and geographic market. As a general liquidity management practice, banks should limit concentration in any one particular funding source or tenor.
58)For institutions active in multiple currencies, access to diverse sources of liquidity in each currency is required, since banks are not always able to swap liquidity easily from one currency to another.
59)Senior management should be aware of the composition, characteristics and diversification of the bank’s assets and funding sources. Senior management should regularly review the funding strategy in light of any changes in the internal or external environments.
60)An essential component of ensuring funding diversity is maintaining market access. Market access is critical for effective liquidity risk management, as it affects both the ability to raise new funds and to liquidate assets. Senior management should ensure that market access is being actively managed, monitored and tested by the appropriate staff.
61)Managing market access can include developing markets for asset sales or strengthening arrangements under which a bank can borrow on a secured or unsecured basis. A bank should maintain an active presence within markets relevant to its funding strategy. This requires an ongoing commitment and investment in adequate and appropriate infrastructures, processes and information collection.
62)A bank should not assume it can access markets in a timely manner for which it has not established the necessary systems or documentation, or where these arrangements have not been periodically utilized or the bank has not confirmed that willing counterparties are in place.
63)A bank should have full knowledge of the legal framework governing potential asset sales, and ensure that documentation is reliable and legally robust.
64)A bank should identify and build strong relationships with current and potential investors. The frequency of contact and the frequency of use of a funding source are two possible indicators of the strength of a funding relationship. A bank should also establish and maintain a relationship with the Central Bank.
65)A bank needs to identify alternative sources of funding that strengthen its capacity to withstand a variety of severe yet plausible institution-specific and market-wide liquidity shocks. Depending on the nature, severity and duration of the liquidity shock, potential sources of funding include the following:
•Deposit growth.
•The lengthening of maturities of liabilities.
•New issues of short- and long-term debt instruments.
•Intra-group fund transfers, new capital issues, the sale of subsidiaries or lines of business.
•Asset securitization.
•The sale or repo of unencumbered, highly liquid assets.
•Drawing-down committed facilities.
•Borrowing from the central bank’s marginal lending facilities.
A Bank must establish a liquidity risk management framework including limits, warning indicators, communication and escalation procedures.