Liquidity risk management frameworkLiquidity risk management framework

Liquidity risk management framework

1. An ADI’s liquidity risk tolerance defines the level of liquidity risk that the ADI is willing to assume. An ADI’s liquidity risk tolerance must be documented and appropriate for the ADI’s operations and strategy and its role in the financial system.
2. The liquidity risk tolerance must be reviewed, at least annually, to reflect the ADI’s financial condition and funding capacity.
3. In setting the liquidity risk tolerance, the Board and senior management must ensure that the risk tolerance allows the ADI to effectively manage its liquidity position in such a way that it is able to withstand a prolonged period of stress.
4. The liquidity risk tolerance must be articulated in such a way that clearly states the trade-off between risks and profits.
5. An ADI’s liquidity risk management framework must clearly set out the organisational structure as it relates to liquidity for the ADI on both a Level 1 and Level 2 basis, and define the responsibilities and roles of management involved in managing liquidity risk.
6. An ADI’s liquidity risk management framework must be formulated to ensure that the ADI maintains sufficient liquidity, including a cushion of unencumbered liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources. The source of liquidity stress could be specific to the ADI or market‑wide or a combination of the two.
7. An ADI’s liquidity risk management framework must be well integrated into the ADI’s overall risk management process.
8. An ADI’s liquidity risk management oversight function must be operationally independent and staffed with personnel who have the skills and authority to challenge the ADI’s treasury and other liquidity risk management businesses.
9. The liquidity management strategy must include specific policies on liquidity management, such as:
   1. the composition and maturity of assets and liabilities;
   2. the diversity and stability of funding sources;
   3. the approach to managing liquidity in different currencies, across borders, and across business lines and legal entities; and
   4. the approach to intraday liquidity management.
10. The liquidity management strategy must take account of the ADI’s liquidity needs under normal conditions as well as periods of liquidity stress. The strategy must include quantitative and qualitative targets.
11. The liquidity management strategy must be appropriate for the nature, scale and complexity of the ADI. In formulating this strategy, the ADI must consider its legal structure, key business lines, the breadth and diversity of markets, products and jurisdictions in which it operates and home and host regulatory requirements.