Effective from Apr 19 2025 - Aug 30 2021
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C. Reporting Format and Content
The ILAAP document should include, at minimum, the following sections:
1. Background
This section is for introductory text describing the following:
i. Business model, Bank/Group structure, balance sheet risks, relevant financial data, the reach and systemic presence of the bank. ii. Internal and external changes since the last ILAAP. iii. Changes in the scope of the document since the last review by the Board of Directors. iv. Justifications of the comprehensiveness and proportionality of the bank’s process. 2. Executive Summary
This section should present an overview of the ILAAP methodology and results. This overview should include:
i. The purpose and coverage of the ILAAP.
ii. The main findings of the ILAAP analysis:
- How much and what composition of liquidity the bank considers it should hold as compared with the liquidity resource requirement ‘pillar 1’ calculation.
- The adequacy of the bank’s liquidity risk management processes.
iii. A summary of the financial projections, including the strategic position of the bank, its balance sheet strength, and future profitability.
iv. Brief descriptions of liquidity plans; how the bank intends to manage liquidity going forward and for what purposes.
v. Commentary on the most material liquidity risks, why the level of risk is acceptable or, if it is not, what mitigating actions are planned.
vi. Commentary on major issues where further analysis and decisions are required.
vii. Who has carried out the assessment, how it has been challenged, and who approved it.
3. Objectives of an ILAAP
This section should present a description of the bank's specific objectives relating to liquidity, such as shareholder returns, rating objectives for the bank as a whole or for certain securities being issued, avoidance of regulatory intervention, protection against uncertain events, depositor protection, working liquidity and liquidity held for strategic acquisitions etc., along with sufficient liquidity resources to cover the nature and level of the liquidity risk to which it is or might be exposed, the risk that the bank cannot meet its liabilities as they fall due, and the risk that its liquidity resources might in the future fall below the level, or differ from the quality and funding profile from those considered as appropriate by SAMA.
4. Governance and Risk Management
This section should describe the governance and management arrangements around the ILAAP including the involvement of the Board of Director, in addition to the risk management framework. At least the following areas should be covered:
i. Description of the process for the preparation and updating of the ILAAP.
ii. Description of the process for reviewing the ILAAP.
iii. Definition of the role and functions assigned to the Board of Directors and Senior Management for the purposes of the ILAAP.
iv. Definition of the role and functions assigned to various corporate functions for the purposes of the ILAAP (for example, internal audit, compliance, finance, risk management, branches and other units).
v. Indication of internal regulations relevant to the ILAAP.
vi. The overall risk management framework and how it pertains to liquidity and funding risks.
vii. Bank’s internal limits and control framework, including the limits and controls around liquid asset buffers, and the appropriateness of the limit structure to the risk appetite.
5. Summary of Bank's Strategies
This section would be a major component of a bank's strategic and operational plans. It should include the following:
i. The present financial position of the bank and expected changes to the current business profile, the environment in which it expects to operate, its projected business plans (by appropriate lines of business), projected financial position and cash flow positions, projected liquidity available and projected liquidity resource required based on future plans.
ii. The starting balance sheet, cash flow statement and the date over which the assessment was carried out.
iii. The projected balance sheet and cash flow statement (for at least one year horizon), which should clearly indicate the major lines of business which are going to be attested by the bank's strategic initiatives, environmental changes and assumption over the planning period and the impact on liquidity requirements by major lines of business.
6. Liquidity Adequacy and ILAAP
This section should, at minimum, cover the following:
6.1 Liquidity Risk Appetite
In this section, banks should describe their liquidity risk appetite, how it was devised, approved, monitored and reported, and how it is communicated throughout the bank. Banks should, at a minimum, cover the following key areas:
i. A full and clear articulation of the bank’s liquidity risk appetite and a discussion of why the risk appetite is appropriate.
ii. A discussion on how the bank’s liquidity risk appetite is used to define and assess liquidity levels and limits, including, at minimum, the following:
- An outline of all relevant liquidity risk management limits as derived from the risk appetite and a discussion of how the limits support the risk appetite.
- Limits for each of the liquidity risk drivers the bank assesses. Given that not all limits will necessarily be quantitative; some may be qualitative and describe subjective risk metrics.
- A brief outlining the bank’s risk appetite and liquidity risk limits, I.e. monitoring limits on periodic dates used for reporting of the Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), Loan to Deposit Ratio (LDR) and SAMA Liquidity Ratio and a demonstration of how the liquidity limits are reflected in SAMA’s returns.
- A brief outlining the limits and positions against limits under “normal” and “stressed” liquidity environments, with a full and complete discussion of positions against limits.
6.2 Disclosure of Liquidity Requirements
This section should provide a distinction from the bank's perspective of the following liquidity measures indicating their purpose, minimum requirements and other attributes:
i. Regulatory Liquidity requirements under LCR, NSFR, LDR, and SAMA Liquidity Ratio.
ii. Liquidity requirements internally specified by Treasurer based on limits.
6.3 Funding Strategy
This section should provide full details of a bank’s three-year funding strategy, with more detail on the first 12-18 months of the funding strategy. The following requirements should be met:
i. The strategy should be approved by the Board Directors or its delegated authority.
ii. The strategy should demonstrate how it will support the projected business activities in both business as usual and stress, implementing any required improvements in the funding profile and evidencing that the risk appetite and key metrics will not be breached by the planned changes.
iii. Risks to the plan should be discussed.
iv. Where a funding strategy is new, implementation procedures should be detailed.
v. The funding risk strategy and appetite, and the profile, both the sources and uses should be described.
Banks should analyse the stability of the liabilities within the funding profile and the circumstances in which they could become unstable. This could include market shifts such as changes in collateral values, excessive maturity mismatch, inappropriate levels of asset encumbrance, concentrations (including single or connected counterparties, or currencies).
Banks are also required to analyse market access and current or future threats to this access, including the impact of any short-term liquidity stresses or negative news.
6.4 Risks Covered and Assessed in the ILAAP
In this section, banks are required to identify, measure and provide mitigation strategies for the most significant liquidity risks they are exposed to. At a minimum, the ILAAP should describe, assess and analyse the following pillar 2 liquidity risk drivers:
i. Wholesale secured and unsecured funding risk
a. Identification of risk, and behavior under normal and stress conditions
b. Deposit concentration risk – exposures concentrated on a limited number of customers, industries, certain sectors or geographic area, etc. entailing vulnerability.
ii. Retail funding risk
a. Gross retail outflows under liquidity stresses.
b. Higher than average likelihood of withdrawal.
iii. Intra-day liquidity risk
c. Net amount of collateral and cash requirement under stresses.
iv. Intra-group liquidity risk
d. Access to other groups, Central Bank funding, Parent Company and other commitments.
v. Cross-currency liquidity risk
e. Significant outflows and inflows with respect to maturities under stress.
f. Foreign Exchange (FX) mismatch risks – banks typically assume that currencies are fungible given the depth of liquidity in the spot FX and FX swap markets, particularly in reserve currencies. However, a bank may not be able to access FX markets as normal in times of stress
vi. Off-balance sheet liquidity risk.
g. Impact on cash flows arising from derivatives, contingent liabilities, commitments and liquidity facilities.
vii. Franchise-viability risk.
h. Stresses where the bank does not have sufficient liquidity resources to maintain its core business and reputation.
viii. Marketable assets risk (under normal and stressed forced sale conditions).
a. High Quality Liquid Assets (HQLA) monetisation risk – a bank may not be able to monetise sufficient non-cash HQLA to cover cumulative net outflows under the LCR stress on a daily basis, because of limitations to the speed with which cash can be raised in the repo market or through outright sales.
ix. Non-marketable assets risk (under normal and stressed forced sale conditions).
x. Funding concentration risk e.g. Flexible funding strategy according to instrument type, currency, counterparty, liability term structure and market for their realization.
xi. Other risks e.g.
a. Liquidity correlation factors associated with other risks i.e. reputational risk, asset concentration risk, Profit Rate Risk in the Banking Book (PRRBB), strategic risks etc. which have a bearing on Bank’s overall liquidity position.
b. Balance sheet mismatch risk - assess whether a bank would have sufficient cash from the monetisation of liquid assets and other inflows to cover outflows on a daily basis, under a defined stress scenario.
c. Macroeconomic and Business cycle risks – risks relating to changes in macroeconomic country specific variables such as oil prices, government spending and GDP.
d. Initial margin on derivatives contracts, where during a period of stress counterparties may, for a number of reasons, increase a bank’s initial margin requirements.
e. Securities margin financing liquidity risks.
The quantification of liquidity risk should fully incorporate the following:
i. Product pricing – it should include significant business activities and both on and off balance sheet products.
ii. Performance measurement and pricing incentives.
iii. Clear and transparent attribution to business lines.
iv. Management of collateral – clearly distinguishing between pledged and unencumbered assets.
v. Management of liquidity risks between intra-day, overnight keeping in view uncertainty or potential disruption.
vi. Managing liquidity across legal entities, business lines and currencies.
vii. Funding diversification and market access keeping in view:
- Business planning process.
- Correlations between market conditions and ability to access funds.
- Adequate diversification keeping in view limits according to maturity, nature of depositor, level of secured and unsecured funding, instrument type, currency and geographic market.
viii. Regular testing the capacity to raise funds quickly from choosing funding sources to provide short, medium and long term liquidity.
ix. An explanation of how each of the above risks have been identified, assessed, measured and the methodology and models currently or to be employed in the future, and the quantitative results of that assessment.
x. Where relevant, a comparison of that assessment with the results of the LCR and NSFR calculations.
xi. A clear articulation of the bank's risk appetite by risk category.
xii. Where relevant, an explanation of method used to mitigate these risks
6.5 Intraday Liquidity Risk
In this section, banks should describe the following:
i. How intraday risk is created within their business, whether part of the payments system or not, their appetite for and approach to managing intraday liquidity risk of both cash and securities accounts and in both business as usual and stress conditions.
ii. Details of how the bank assesses the adequacy of the process of measuring intraday liquidity risks, especially that resulting from the participation in the payment, settlement and clearing systems.
iii. Details of how the bank adequately monitors measures to control cash flows and liquid resources available to meet intraday requirements and forecasts when cash flows will occur during the day.
iv. How the bank carries out adequate specific stress-testing for intraday operations.
7. Approach and Methodology
7.1 Current Methodology
In this section, banks should describe the framework and IT systems for identifying, measuring, managing and monitoring and both internal and external reporting of liquidity and funding risks, including intraday risk. The assumptions and methodologies adopted should be described, key indicators should be evidenced, and the internal information flows described.
7.2 Future Approach and Methodology
Banks may provide a summary on the future models and methodologies being considered and developed including their strengths and weaknesses.
7.3 Internal Models: Pillar 1 and ILAAP Comparisons
Should the internal models vary from any regulatory methodologies approved for LCR and NSFR purposes, this section would provide a detailed comparison explaining both the methodological and parameterization differences between the internal models and the regulatory models and how those affect the liquidity measures for ILAAP purposes.
Further, the explanation of the differences between results of the internal models for LCR, NSFR would be set out at the level at which the ILAAP is applied. SAMA would expect the explanation to be sufficiently granular to show the differences at the level of each of the Pillar 1 risks.
8. Details on Models Employed
In this section, banks should present the list of models utilized in the formulation of the ILAAP, giving relevant and appropriate details as given below:
i. The key assumptions and parameters within the liquidity modeling work and background information on the derivation of any key assumptions.
ii. How parameters have been chosen including the historical period used and the calibration process.
iii. The limitations of the model.
iv. The sensitivity of the model to changes in the key assumptions or parameters chosen.
v. The validation work undertaken to ensure the continuing adequacy of the model.
vi. Whether the model is internally or externally developed. If externally acquired, its generic name and details on the model developer.
vii. The extent of its acceptance by other regulatory bodies, users in the international treasurers’ community, overall reputation and market acceptance.
viii. Specific details on the applications within the bank.
ix. Major merits and demerits of the chosen models.
x. Results of the model validation obtained through:
- Back testing / Scenario testing.
- Analysis of the internal logic.
xi. Major methodologies or statistical technique used, i.e. Value at risk models, employing methods such as variance/co-variance, historical simulation and Monte Carlo method.
xii. Confidence levels embedded for regulatory liquidity or economic liquidity purposes.
xiii. Data definition, i.e. whether the source is external or internal and if any data, manipulation of external data has been done for it to conform to the internal data.
9. Liquidity Specific Stress-Testing
In this section, banks should undertake, at least, the following:
i. Analyse the internal liquidity risk stress-testing framework, including the process and governance of and challenge to scenario design, derivation of assumptions and design of sensitivity analysis, and the process of review and challenge and relevance to the risk appetite.
ii. Scrutinise the process by which the stress results are produced, and incorporated into the risk framework and strategic planning, and the liquidity recovery process.
iii. Analyse the results and conclusions, with breakdown by each relevant risk driver.
Details of further stress-testing requirements are in Annexure (1).
10. Liquidity Transferability Between Legal Entities
In this section, banks should provide details of any restrictions on the management's ability to transfer liquidity during stressed conditions into or out of the businesses covered. These restrictions, for example, may include contractual, commercial, regulatory or statutory nature. A regulatory restriction could be the minimum liquidity ratio acceptable to SAMA.
11. Aggregation and Diversification
This section should describe how the results of the various risk assessments are brought together and an overall view taken on liquidity adequacy. At the general level, the overall reasonableness or the detailed quantification approaches might be compared with the results of an analysis of liquidity planning and a view taken by senior management as to the overall level of liquidity that is appropriate.
In aggregating the risks, the following aspects of the aggregation process should be described:
i. Any allowance made for diversification, including any assumed correlations within risks and between risks and how such correlations have been assessed including in stressed conditions.
ii. The justification for diversification benefits between and within legal entities , and the justification for the free movement of liquidity between legal entities in times of financial stress.
12. Challenge and Adoption of the ILAAP
This section should describe the extent of challenge and testing of the ILAAP. Accordingly, it would include the testing and control processes applied to the ILAAP models or calculations, and the senior management and Board of Directors review and sign off procedures.
In making an overall assessment of a bank's liquidity needs, matters described below should be addressed:
i. The inherent uncertainty in any modeling approach.
ii. Weaknesses in bank's risk management procedures, systems or controls.
iii. The differences between regulatory liquidity and available liquidity.
iv. The reliance placed on external consultants.
v. An assessment made by an external reviewer or internal audit.
13. Use of the ILAAP within the Bank
In this section, banks should demonstrate the extent to which liquidity management is embedded within the bank's operational and strategic planning. This would include the extent and use of ILAAP results and recommendations in the ongoing reviews and assessment of liquidity, day to day decision making, Contingency Funding Plan (CFP) and overall strategic, operational and liquidity planning process.
Important elements of ILAAP including growth and profitability targets, scenario analysis, and stress-testing may be used in setting of business plans, management policy and in pricing decisions. This could also include a statement of the actual operating philosophy and strategy on liquidity management and how this links to the ILAAP submitted.
14. Future Refinements of ILAAP
A bank should detail any anticipated future refinements within the ILAAP, highlighting those aspects which are work-in-progress, and provide any other information that will help SAMA review a bank's ILAAP.
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