1)The qualitative requirements are based on the Basel Committee on Banking Supervision (BCBS) document titled “Principles for Sound Liquidity Management and Supervision" dated September 2008. We encourage banks to familiarize themselves with the content of this document.
2)The Regulations requires banks to comply with 12 criteria when setting up their liquidity risk management and governance frameworks. These criteria are essential for a robust framework designed to minimize liquidity risk at banks. These criteria are discussed below in details:
Banks are responsible to manage their liquidity risk in a prudent manner using all available liquidity management tools at their disposal.
3)A bank should establish a robust liquidity risk management framework that is well integrated into the bank-wide risk management process. A primary objective of the liquidity risk management framework should be to ensure with a high degree of confidence that the firm is in a position to both address its daily liquidity obligations and withstand a period of liquidity stress affecting its funding sources, the source of which could be bank-specific or market-wide.
The Board of directors bears ultimate responsibility for liquidity risk management within the bank. The board should clearly articulate liquidity risk tolerance for the bank in line with the banks objectives, strategy and overall risk appetite.
4)The board of directors is ultimately responsible for the liquidity risk assumed by the bank as well as the manner in which this risk is managed and, therefore, should establish the bank’s liquidity risk tolerance.
5)Liquidity risk tolerance is defined as the level of liquidity risk that the bank is willing to assume, it should be appropriate for the business strategy of the bank and its role in the financial system and should reflect the bank’s financial condition and funding capacity. The tolerance level should ensure that the firm manages its liquidity well in normal times to enable it to withstand a prolonged period of stress. There are a variety of ways in which a bank can express its risk tolerance. For example, a bank may quantify its liquidity risk tolerance in terms of the level of funding gap the bank decides to assume under normal and stressed business conditions for different maturity buckets.
Board members should familiarize themselves with liquidity risk and how it is managed. At least one board member should have detailed understanding of liquidity risks management.
6)The board of directors, as a whole, should have a thorough understanding of the close links between funding liquidity risk (capacity to meet expected and unexpected cash flows without significant interruptions to bank’s operations and financial position) and market liquidity risk (the ability to close positions in the market at a reasonable cost). The board should also understand how other risks affect the bank’s overall liquidity risk strategy, i.e. how a tighter funding market will impact the bank’s liquidity and how other risks, if materialized, could result in a liquidity run on the bank.
7)The board should have in place a system to review liquidity reports sent to it by management and identify liquidity concerns and follow up on remedial action undertaken by management. It should also ensure that senior management and appropriate personnel have the necessary expertise and systems to measure and monitor all sources of liquidity risk.
8)The board should ensure that senior management translates the strategy into clear policies, controls and procedures.
Senior management is to develop a strategy, policies and practices to manage liquidity risk in accordance with the board of directors' approved risk tolerance and ensure that the bank maintains sufficient liquidity. The bank's strategy should be continually reviewed and compliance should be reported to the board of directors on a regular basis.
9)Senior management has an integral role in liquidity risk management as it is responsible to implement the board approved risk appetite.