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
|
