Management of liquidity riskManagement of liquidity risk

Management of liquidity risk

1. An ADI must have a sound process for identifying, measuring, monitoring and controlling liquidity risk. This process must include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet items over an appropriate set of time horizons.
2. An ADI must set limits to control its liquidity risk exposure and vulnerabilities. Limits and corresponding escalation procedures must be reviewed regularly. Limits must be relevant to the business in terms of its location, complexity of activity, nature of products, currencies and markets served. Where a liquidity risk limit is breached, an ADI must implement a plan of action to review the exposure and reduce it to a level that is within the limit.
3. An ADI must actively manage its collateral positions, differentiating between encumbered and unencumbered assets. An ADI must monitor the legal entity and physical location where collateral is held and how it may be mobilised in a timely manner.
4. An ADI must design a set of early warning indicators to aid its daily liquidity risk management processes in identifying the emergence of increased risk or vulnerabilities in its liquidity risk position or potential funding needs. Such early warning indicators must be structured so as to assist in the identification and escalation of any negative trends in the ADI’s liquidity position and lead to an assessment and potential response by management to mitigate the ADI’s exposure to these trends.
5. An ADI must have a reliable management information system that provides the Board, senior management and other appropriate personnel with timely and forward-looking information on the liquidity position of the ADI.
6. An ADI must actively manage its intraday liquidity positions and risks in order to meet payment and settlement obligations on a timely basis under both normal and stressed conditions, thus contributing to the orderly functioning of payment and settlement systems.
7. An ADI must develop and implement a costs and benefits allocation process for funding and liquidity that appropriately apportions the costs of prudent liquidity management to the sources of liquidity risk and provides appropriate incentives to manage liquidity risk.
8. An ADI active in multiple currencies must:
   1. maintain liquid assets consistent with the distribution of its liquidity needs by currency;
   2. assess its aggregate foreign currency liquidity needs and determine an acceptable level of currency mismatches; and
   3. undertake a separate analysis of its strategy for each currency in which it has material activities, considering potential constraints in times of stress.