[TYPE
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
LIQUIDITY RISK
Monetary Authority of Singapore
Monetary Authority of Singapore
March 2013
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
Monetary Authority of Singapore
GUIDELINES ON RISK MANAGEMENT PRACTICES MARCH 2013
- LIQUIDITY RISK
Table of Contents
1 Introduction 1
2 Fundamentals 1
3 Principles for Sound Liquidity Risk Management 2
3.1 Application of Guidelines 2
3.2 Governance 2
3.3 Strategies, Policies and Procedures 2
3.4 Measurement and Management of Liquidity Risk 3
3.5 Contingency Funding Plan 4
3.6 Stress Testing and Scenario Analysis 4
3.7 Foreign Currency Management 4
3.8 Asset Encumbrance 4
Checklist of Sound Practices to Adopt I
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1 INTRODUCTION
These guidelines provide guidance on sound liquidity risk
management practices. The extent and degree to which an institution adopts
these guidelines should commensurate with the size, nature and complexity of
its activities.
2 FUNDAMENTALS
2.1 Liquidity risk refers to the risk of an institution being unable to meet
its financial obligations as they fall due without incurring unacceptable costs or
losses through fund raising and assets liquidation. It could be a result of the
inability of the financial institutions to manage unplanned decreases or
changes in funding sources and the failure to recognise or address changes in
market conditions that affect the institution’s ability to liquidate assets quickly
and with minimal loss in value.
2.2 Liquidity risk often arises from other forms of financial risk such as
credit and market risks. Real or perceived problems in any business area may
hinder an institution's ability to raise funds at reasonable prices, thereby
increasing liquidity risk. For example, large credit losses due to loan defaults
could cause liquidity problems for an institution if providers of funding were to
become concerned about the impact of the losses on the institution’s
creditworthiness. For insurers, the nature of their business typically results in
a lower exposure to liquidity risk compared with banks. However, perceived
reputational issues with a life insurer may result in large surrenders over a
short period that require the insurer to liquidate assets at depressed prices.
For general insurers, even though their policies do not have cash values, a
series of large claims over a short period may still result in liquidity shortfalls.
Therefore, an institution’s consideration of liquidity risk should capture all risk
factors that it is exposed to, and it must manage these risks soundly.
2.3 A liquidity crisis could have a negative impact on earnings and
capital and, in the extreme, cause the collapse of an otherwise solvent
institution. Earnings and growth potential could be negatively affected if an
institution’s liquidity position constrains it from undertaking a transaction at
normal market prices.
2.4 An institution should have a strategy to manage its liquidity risk
prudently and adequately. The strategy should take into account the
institution’s risk profile, risk appetite as well as market and macroeconomic
conditions. Policies and processes should be established to support the
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execution of this strategy and ensure compliance with the liquidity
requirements. These should cover the identification, measurement,
evaluation, monitoring, reporting and control or mitigation of liquidity risk over
an appropriate set of time horizons.
3 PRINCIPLES FOR SOUND LIQUIDITY RISK MANAGEMENT
3.1 Application of Guidelines
This section outlines the key principles for sound liquidity risk
management. Institutions should also take into account relevant regulatory
requirements and industry standards such as the Basel Committee on
Banking Supervision Principles for Sound Liquidity Risk Management and
Supervision published in September 2008, where appropriate. Insurers
should adopt the principles and sound practices provided in these guidelines
to the extent applicable to the nature of their business.
3.2 Governance
3.2.1 An institution should consistently observe prescribed liquidity
requirements.
3.2.2 An institution should assess its liquidity risk profile (including on-
and off-balance sheet risks) in the context of the markets and macroeconomic
conditions in which it operates.
3.2.3 An institution should have a robust liquidity management
framework that requires maintaining sufficient liquidity to withstand a range of
stress events. This includes appropriate policies and processes for managing
liquidity risk that have been approved by the institution’s Board of Directors
(“Board”). These policies and processes should also provide a comprehensive
institution-wide view of liquidity risk and are consistent with the institution’s
risk profile.
3.3 Strategies, Policies and Procedures
3.3.1 An institution should have liquidity strategies, policies and
processes that establish an appropriate and properly controlled liquidity risk
environment including:
(a) clear articulation of an overall liquidity risk appetite that is
appropriate for the institution’s business and its role in the
financial system and that is approved by its Board;
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(b) sound day-to-day and intraday liquidity risk management
practices;
(c) effective information systems to enable active and timely
identification, aggregation, monitoring and control of liquidity
risk exposures and funding needs (including active
management of collateral positions) institution-wide;
(d) adequate oversight by the institution’s Board in ensuring that
management effectively implements policies and processes
for the management of liquidity risk in a manner consistent
with the institution’s liquidity risk appetite; and
(e) regular review by the institution’s Board (at least annually)
and appropriate adjustment of the institution’s strategy,
policies and processes for the management of liquidity risk in
the light of the institution’s changing risk profile and external
developments in the markets and macroeconomic conditions
in which it operates.
3.4 Measurement and Management of Liquidity Risk
An institution should establish and regularly review funding
strategies and policies and processes for the ongoing measurement and
monitoring of funding requirements and the effective management of funding
risk. The policies and processes should take into account how other risks
(e.g. credit, market, operational and reputation risk) may impact the
institution’s overall liquidity strategy, and include:
(a) an analysis of funding requirements under alternative
scenarios;
(b) the maintenance of a cushion of high quality, unencumbered,
liquid assets that can be used, without impediment, to obtain
funding in times of stress;
(c) diversification in the sources (including counterparties,
instruments, currencies and markets) and tenor of funding,
and regular review of concentration limits;
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(d) regular efforts to establish and maintain relationships with
liability holders; and
(e) regular assessment of the capacity to sell assets.
3.5 Contingency Funding Plan
An institution should have robust contingency funding plans to
handle liquidity problems. An institution’s contingency funding plan should be
formally articulated, adequately documented and set out the institution’s
strategy for addressing liquidity shortfalls in a range of stress environments
without placing reliance on lender of last resort support. The institution’s
contingency funding plan should establish clear lines of responsibility, include
clear communication plans (including communication with the supervisor) and
be regularly tested and updated to ensure it is operationally robust.
Interactions with other related entities should also be considered.
3.6 Stress Testing and Scenario Analysis
An institution should include a variety of short-term and protracted
institution-specific and market-wide liquidity stress scenarios (individually and
in combination), using conservative and regularly reviewed assumptions, into
its stress testing programmes for risk management purposes. The results of
the stress tests should be used by the institution to adjust its liquidity risk
management strategies, policies and positions and to develop effective
contingency funding plans.
3.7 Foreign Currency Management
Where an institution’s foreign currency business is significant, or
the institution has significant exposure in a given currency, the institution
should undertake separate analysis of its strategy and monitor its liquidity
needs separately for each such significant currency. This includes the use of
stress testing to determine the appropriateness of mismatches in that
currency and, where appropriate, the setting and regular review of limits on
the size of its cash flow mismatches for foreign currencies in aggregate and
for each significant currency individually.
3.8 Asset Encumbrance
An institution’s levels of encumbered balance-sheet assets should
be managed within acceptable limits to mitigate the risks posed by excessive
levels of encumbrance in terms of the impact on the institution’s cost of
funding and the implications for the sustainability of its long-term liquidity
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position. An institution should provide adequate disclosure of such risks and to
set appropriate limits to mitigate the identified risks.
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Appendix
CHECKLIST OF SOUND PRACTICES TO ADOPT
[The checklist summarises the key practices only and is not meant to be
exhaustive.]
Ref Sound Practice Yes/No
A Risk Management Strategy, Policies and Procedures
1 Strategy
Is the institution’s liquidity strategy defined to meet
potential short and long term funding needs and to deal
with potential liquidity disruptions?
Is the strategy approved by the Board?
Is the liquidity strategy evaluated regularly to ensure that it
remains valid?
2 Policies
Is there a comprehensive liquidity policy covering at the
minimum:
liquidity strategy;
board and management’s responsibilities;
liquidity risk management structure;
liquidity risk management tools;
liquidity risk limits and ratios;
liquidity risk management in individual currencies;
and
contingency plan?
Is the liquidity policy approved by the Board (or head
office) and senior management/Asset & Liability
Committee (ALCO)?
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Ref Sound Practice Yes/No
Is the liquidity policy reviewed at the Board (or head office)
and senior management/ALCO level at least annually and
when there are any material changes in the institution’s
current and prospective liquidity risk profile?
Are significant and frequent policy exceptions reviewed
and approved regularly?
3 Procedures
Are appropriate procedures and processes established to
implement the liquidity policy?
Are the procedures and processes reviewed and updated
periodically?
4 ALCO
Does ALCO comprise senior management from each
major section of the institution that assumes and/or
manages liquidity risk?
Does ALCO meet on a frequency that is commensurate
with the institution’s business activities?
Are the terms of reference, composition, minimum quorum
and frequency of meeting of the ALCO formalised and
clearly documented?
B Risk Measurement, Monitoring and Controls
1 Funding Requirements
Are net funding requirements identified by assessing cash
inflows against outflows?
Is the maturity mismatch profile constructed to measure
both near- and long-term liquidity needs?
Are all cashflows (including off-balance sheet items)
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Ref Sound Practice Yes/No
captured under the maturity profile? If not, are these
excluded cashflows approved by senior
management/ALCO?
Are cashflow exclusions reviewed periodically to ensure
that the exclusions remain appropriate?
Does the maturity profile have adequate time bands to
effectively monitor both near- and long-term liquidity
needs?
Are the assumptions underlying the behaviour of assets,
liabilities and off-balance sheet items, used in preparing
the maturity profile, clearly detailed?
Are the behavioural assumptions supported by empirical
evidence?
Are the behavioural assumptions approved by senior
management/ALCO and well-documented?
Are the behavioural assumptions reviewed periodically to
ensure their continuing validity?
Does the maturity profile have appropriate granularity to
reflect the nature of business?
Are limits on the acceptable size of the cumulative funding
mismatch position for the near-term time bands
(particularly positions from sight up to one month)
established?
Is there a maturity mismatch analysis of all cashflows
denominated in Singapore Dollars?
Is there a separate maturity mismatch analysis of each
foreign currency which represents a significant portion of
the institution’s total funding and/or is considered to be not
easily convertible?
Are maturity mismatch limits established for individual
currencies?
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Ref Sound Practice Yes/No
2 Funding Concentrations
Are appropriate concentration limits established?
Is there a system for monitoring compliance with the
concentration limits?
Are the concentration limits reviewed periodically and
when market conditions warrant a review?
Is there an ongoing analysis of the funding liabilities to
assess the exposure to funding concentration risks (by
type of funding instruments, nature of funds provider and
maturity profile)?
3 Funding Capacity
Is the “normal” funding capacity in both retail and
wholesale markets well estimated?
Is there a process to monitor the ability to raise funds in
both retail and wholesale markets?
4 Intra-Group Liquidity
Is intra-group liquidity analysed and monitored effectively?
Are regulatory or legal impediments to accessing liquidity
from related sources addressed in the intra-group liquidity
analysis and monitoring program?
5 Scenario Analysis
Are plausible event-driven scenarios constructed to
analyse the behaviour of cashflows under these scenarios
on a periodic basis?
Does the scenario analysis encompass a range of specific
events and at minimum, include the following scenarios:
institution-specific crisis scenario; and
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Ref Sound Practice Yes/No
general market crisis scenario?
Are the assumptions underlying the behaviour of the
cashflows of assets, liabilities and off-balance sheet items
clearly detailed under all crisis scenarios?
Are these assumptions approved by senior
management/ALCO?
Are the behavioural assumptions reviewed periodically to
ensure their continuing validity?
Does senior management/ALCO review the results of the
scenario analysis?
Are the results of the scenario analysis and any resulting
actions reported to and discussed with the Board?
6 Contingency Plan
Does the institution have a contingency funding plan? Is
the plan reviewed regularly (at least annually) by the
Board?
Is the contingency plan comprehensive? Does the plan:
designate the personnel responsible for
identification of crisis and contingency
management;
define clearly the responsibilities of all personnel in
a crisis situation;
specify the early warning indicators to identify an
approaching liquidity crisis event;
establish reporting procedures to ensure that all
necessary information is available for the Board
and/or senior management to make quick decisions;
set out procedures for making up cashflow shortfalls
in crisis situations;
outline courses of action for altering asset and
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Ref Sound Practice Yes/No
liability behaviour; and
detail the plan for public relations and media
management?
Is the contingency management information system tested
regularly to ensure the availability of timely reports for
rapid decision-making during periods of liquidity
disruptions?
7 Limits and Ratios
Have the Board and/or senior management/ALCO
established limits on the nature and amount of liquidity risk
that the institution is willing to assume?
Are the types of limits documented in the liquidity policy
and reviewed periodically (at least annually)?
Is there a system for monitoring compliance with the
established limits?
Is the responsibility for monitoring limits assigned to a
function independent of the funding desks?
Is there a defined procedure for reporting limit exceptions
to the appropriate authorities?
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